The battle to cool down the planet ironically appears to be heating up the economy. This is due to ‘greenflation’: an unwanted price hike that occurs in the green industry when cost-push inflation threatens the world.
As the world grapples with the after effects of the pandemic, raw material prices around the world soar and energy crises overlap. This increases fears for ‘greenflation,’ a burning issue in today’s environment conscious world. The word literally means inflation caused by the rise in the price of goods in the green energy sector. It refers to a situation where prices of raw materials and minerals, extensively used in the creation of renewable technologies rise, making green initiatives costly.
MOST CAPITALS ARE CONSIDERING SPEEDING UP THE TRANSITION TO RENEWABLES, WHICH WOULD UNDOUBTEDLY ADD TO THE INCREASING PRICE PRESSURE ON CRITICAL ENERGY TRANSITION COMMODITIES.
European Union (EU) countries, like Germany and France plan to achieve carbon neutrality by 2045 and 2050. Britain, The United States and Japan are also pushing for the same goal by 2050. However, the global agenda for achieving net zero carbon emission and other green benchmarks is not without its costs and one must dig a little deeper if they are to understand the charged interplay between economics and the environment, due to which greenflation, and relatedly global inflation, is taking flight.
First, commodity prices for copper, aluminium, and lithium are on the rise. Unfortunately, these commodities are essential for manufacturing eco-friendly products like electric vehicles as well as equipment which reduces carbon emissions like solar, wind and hydrogen fuel. The trickle down effect in the supply chain makes green initiatives dearer and the phenomenon invariably affects green companies and environment conscious consumers alike.
Secondly, in the short term, the process of building a green economy will make extensive use of metal raw materials and oil, both expensive commodities, so green inflation is expected to rise. Further, green inflation seems to be aggravated more and more by climate change. In Europe, for example, recent analysis suggests that the rate of operation for existing gas and coal power plants actually increased as the supply of wind power, which accounts for 16% of electricity production, dropped due to the sweltering heat and dry climate in the year, disrupting the electricity production in the continent. As a result, power generation costs such as carbon emission ticket prices increased and electricity bills rose, causing inflation.
Third, carbon emissions are unavoidable in the process of producing metal raw materials so essential to the green economy. For instance, in order to build renewable energy infrastructure which would reduce carbon emissions, the production of related equipment such as solar panels and wind turbines must be increased. As aluminium is essential to the production of this technology, its usage cannot be prevented, even if it is one of the most serious environmental polluters among all other metals present in the world. Likewise, copper, another culprit, is found to be used 6 times more at solar and wind power plants than conventional power facilities. The mining project period in Chile and Peru, which contributes about 40% of the world’s copper supply, has been increased from 5 to 10 years.
In the same way, the lithium-ion battery in most electric vehicles (EVs) requires around 25 pounds of lithium and 30 pounds of cobalt as well as quantities of nickel, copper, graphite, steel and aluminium. According to the International Energy Agency, the number of EVs is set to rise from 11m today to 145m by 2030, and even that is only a fraction of the roughly 1.2 billion combustion engine vehicles currently on the road; it is safe to assume that the demand for batteries will remain huge for years to come.
Unsurprisingly, this is causing a commodity boom. Minerals such as copper, nickel, lithium, and cobalt, however, are in short supply despite recent price hikes. This is partly due to geopolitical factors: rare earth metals, for example, are concentrated in only one or two nations. Parallelly, the supply response that profit-maximising mining and energy businesses would expect is either non-existent or very slow.
GOVERNMENTS AND CONSUMERS HAVE NOT JUST MOVED THEIR INTERESTS TOWARDS GREEN ENERGY SOURCES, THERE HAS ALSO BEEN A SURGE IN DEMAND FOR OTHER SUSTAINABLE PRODUCTS.
Fourth, we live in a global economy where most of the things we buy are shipped around the world. The cost of shipping these goods can be expected to rise in line with energy prices, adding more and more to the global price hike. The conflict in Ukraine is further interrupting supply networks and has a considerable impact on commodity prices. Take for example, the recent enormous rise in the price of nickel, a critical metal used in batteries and wind turbines. As a result of the crisis, European countries are rethinking their energy security strategy. Most capitals are considering speeding up the transition to renewables, which would undoubtedly add to the increasing price pressure on critical energy transition commodities.
All this will inexorably limit the efforts of major countries to slow global warming and hike up green inflation as well as global inflation..
Interestingly, however, although oil demand is rising, it seems like energy companies in the US and Europe are extremely passive in investing in oil exploration and development. China, which has been criticised for its oversupply of raw materials such as iron ore and steel in the past, has also drastically reduced production to achieve its carbon neutral goal. Globally, crude oil producers appear to have cut capital spending by about half over the last ten years, and they are unlikely to start spending again until they see sustained high prices.
Of course, the higher that oil prices go, the more financial sense it makes to invest in green energy production. Governments and consumers have not just moved their interests toward green energy sources, there has also been a surge in demand for other sustainable products. This has largely been driven by a change in consumer tastes, but also to a significant extent by new government regulations. This increase in demand, combined with the ongoing COVID-19 supply chain disruptions, has pushed up prices for green goods in sectors ranging from vegetable protein used for non-meat foods, to raw materials required for batteries in electric vehicles, and the rare resources in the earth used in all sorts of green energy technology.
In his recent book ‘How to Avoid a Climate Disaster’, Bill Gates describes greenflation as the green premium. This premium, in Gates terms, is the “difference in cost between a product that involves emitting carbon and an alternative that doesn’t.”
There is no simple solution to this dilemma because combating climate change and protecting people’s living standards are both critical, yet prioritising one appears to put the other in jeopardy. One possible path forward could be to focus not only on decarbonising supply (electricity grids, transportation, and industry), but also on decarbonising demand. To put it another way, we need to change the way we travel, consume, and live to limit the amount of carbon we produce.
To solve the conundrum between reducing traditional fossil fuel use and building a new green economy, we need to find a balance between the two. There is no doubt that reducing greenhouse gas emissions is an urgent task for mankind, but it is not the best idea to ban new mining projects or genetic exploration altogether. Trying to end the old economy that emits carbon on a large scale too fast will not only make it difficult to avoid the impact of green inflation, but it can also delay the construction of a green economy.