It is a pity to read that inflation is a bigger problem than the environment, when the two are linked.
Posted at 11:00 a.m.
Past inflation rates have always been underestimated because all the costs and their increase have not been taken into account. Today the real costs are hitting and the repercussions will be seen in a short period of time because our politicians have waited too long.
India will experience drought in 2022 due to climate change. Its wheat production is in danger. It decides not to export any more to protect its population. Markets are panicking and the scarcity of wheat is causing prices to skyrocket (combined of course with the war in Ukraine). Inflation is galloping.
Do you think rising interest rates will fix the drought? Our past laxity strikes.
What costs have been forgotten for so long? Externalities. These are social and environmental costs that are not considered in the cost of production of goods and services. These are not out-of-pocket costs (this is not a cheque). Air has always been free. Those who polluted did not pay for their damage. It is often the same for water, forests, arable land, oceans…
We have paid too little for a liter of gasoline for decades. Today is the return of the pendulum. Global warming is taking its toll and many goods will become more expensive… like wheat.
The rise in the price of oil is the only positive point of the war in Ukraine. Above all, we must not set a ceiling price, as the Parti Québécois suggests, or reduce taxes, as the Conservatives suggest. It is high time that we assume the true costs of this harmful product. We taxed tobacco because it is a harmful product that entails costs for society. Those who depend on it must bear this cost or quit smoking. The same is true for oil. If we had borne its true cost for decades, we would not be dependent on a Russian despot. We would have either limited our use or developed other sources of energy.
Here is a very simple example:
- An ordinary bag of fruit costs $10, but its production creates significant environmental problems (externalities). Farmers who produce these fruits without harming the environment charge $14 for the same bag due to additional costs (including less productive land).
- The following year, due to the increase in some out-of-pocket costs, ordinary fruit cost $10.10. Economists will be happy to say that inflation was only 1%. In fact, these fruits should have still cost $14 (or let’s say $14.14). We report the problem. The 1% is wrong.
- The following year, the environmental problems are more important, people are worried, the over-exploited lands are less productive, etc. Regular fruit is now selling for $11 for an inflation rate of 8.9% (from the previous $10.10). Politicians are panicking and indicating that we are moving away from the 2% target. The problem is not the 8.9%, but rather the 1% which was undervalued because it did not take into account all the costs (of course, I should have done the analysis over several years) . We have constantly undervalued and ignored the true past costs.
- Eventually, this bag will cost $14 (plus inflation on out-of-pocket costs). Inflation will be huge.
It’s the same principle with bees. We forget the true costs of insecticides. It kills bees, so there is less pollination, so less fruit, so higher costs. This is another externality that has been neglected for too long.
Organic carrots cost more than regular carrots. Illogical! If the plastic bag offered in grocery stores cost $2 (thanks to ecotaxation), demand would decrease. By not charging anything, we postpone the problem.
The cost is there, no matter what. Either we assume it right away, or we postpone it through the future harmful effects of plastic. The same goes for the damn water bottles.
When all goods demand dollars equal to their actual costs, it won’t be much fun when it comes to inflation.
The rise in interest rates will have certain effects, especially in the short term, and in particular on real estate. However, this will not solve the inflation of a host of goods that are suffering from a supply problem combined with externalities that are beginning to cry out loud. Aid measures for the most disadvantaged should be the priority, while for the others, cuts will unfortunately have to be made elsewhere. It is the reality that strikes.
Taking care of the environment is also taking care of inflation.
To believe that adaptation to climate change is “expensive” is simply absurd, ridiculous and stupid.
Some of our politicians do not have the competence to adequately answer such a basic question: what is a cost?