climate crisis | Beware of the risk of “green inflation”

The costs of climate events and the eco-energy transition will weigh on the economy and financial markets just as much as inflation. A phenomenon called green inflation (green inflation in English), which is the focus of the recent special report from the Economic Studies Department of the Desjardins Group. Summary of key findings.

Posted at 8:00 am

Martin Vallieres

Martin Vallieres
The press

What is the green inflation ?

“It is now clear that the energy transition and global warming will change the way our society works,” economist Marc-Antoine Dumont, who prepared the analysis report, immediately points out the origin of the term green inflation.

“Whether we’re talking about buying greener goods, tightening environmental standards, or rising sea levels, these changes risk transforming the economic and financial landscape as we know it. This could lead to supply imbalances [de certains biens et services] would be lower than demand and thus cause price increases, a phenomenon known as green inflation. »

What main causes?

Economist Marc-Antoine Dumont identifies two main drivers of the risk of green inflation: climate events that affect the production and supply of essential goods, especially in agriculture, and scarcity of raw materials and production capacity of goods that are essential for the energy transition (ed Note: without fossil fuels).

“The main cause of green inflation it’s very easy. It is an extreme weather event like a storm that destroys or damages manufacturing facilities, reducing the supply of a good or commodity and consequently causing a price increase,” explains Mr. Dumont.

However, “unfortunately, the destruction of supply by extreme weather events is an increasingly common phenomenon. The supply of raw materials, particularly in agriculture, is being severely impacted by declining yields of certain staple crops such as corn, rice and wheat.”

Shortage of energy-efficient goods?

“In view of the unavoidable consequences of global warming, more and more people are adapting their consumption and transport habits in order to minimize their carbon footprint,” says economist Marc-Antoine Dumont, explaining the second main cause green inflation.

For example, “the increased affordability of several green technologies, combined with government incentives, is leading to a significant increase in the purchase of clean goods and services such as electric cars.”

However, Mr. Dumont notes that “the massive deployment of electric vehicles, wind energy or solar energy requires industrial production capacities and technologies that are not yet optimized and the costs of which remain high”.

The Desjardins economist cites as an example the sharp rise in the price of minerals such as lithium, which is essential for the production of electric batteries and whose price has risen by 600% in the last three years.

“Demand for some metals necessary for the energy transition will increase sharply, while supply will remain limited,” notes Marc-Antoine Dumont.

“New mines are needed to feed this growing appetite for metals. However, mining producers also have to deal with declining quality of the minerals. [de mines existantes]which pushes up production costs as more energy is needed” to extract these minerals.

How can the phenomenon be mitigated?

According to economist Marc-Antoine Dumont, “given the complexity and magnitude of the challenges related to the energy transition, there will most likely be price adjustments in some industries”.

Among other things, “the costs of environmental pollution would be integrated into the production costs for the first time”. (For example by integrating the costs related to emission allowances, mandatory recovery/recycling costs, etc.)

That is, according to Mr. Dumont, the risk of green inflation remain “avoidable” because it is “rather associated with an uncoordinated environmental turnaround” by the authorities involved.

For example, “A transition [énergétique] late is to cause a higher risk green inflationsince the measures applied will lead to further market distortions”.

The economist Marc-Antoine Dumont also anticipates “all the more the transition [énergétique] delayed, the greater the consequences of extreme weather events.

Therefore, he concludes, “continued decarbonization efforts while maintaining a good calibration of public and monetary policies are essential to mitigate the risks associated with global warming and green inflation “.

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