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

The costs generated by 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 (greenflation in English) on which the most recent special report of the Economic Studies Department of Desjardins Group focuses. Summary of key findings.

Martin Vallieres
The Press

What is the greenflation ?

“It is now clear that the energy transition as well as global warming will change the way our society works”, immediately indicates the economist Marc-Antoine Dumont, who prepared the analysis report, to explain the origin of the concept of greenflation.

“Whether we are talking about the purchase of eco-responsible goods, the tightening of environmental standards or the rise in sea levels, these changes risk transforming the economic and financial environment as we know it. This could create imbalances where the supply [de certains biens et services] would be lower than demand and thus cause price increases, a phenomenon known as greenflation. »

What main causes?

Economist Marc-Antoine Dumont identifies two main causes of the risk of green inflation: climatic events affecting the production and supply of essential goods, especially in agriculture, as well as shortages of raw materials and production capacity of goods essential to the energy transition (Editor’s note: excluding fossil fuels).

“The primary cause of greenflation is quite simple. It is an extreme weather event, such as a storm that destroys or damages production sites, thus limiting the supply of a good or a commodity and, consequently, causing a price increase,” explains Mr. Dumont. .

However, “the destruction of supply by extreme weather events is unfortunately an increasingly frequent phenomenon. There is a significant effect on the supply of raw materials, especially in agriculture, with a drop in the yields of certain staple crops such as corn, rice and wheat”.

Undersupply of energy-efficient goods?

“Faced with the unavoidable consequences of global warming, more and more individuals are adapting their consumption and transport habits in order to minimize their carbon footprint”, notes the economist Marc-Antoine Dumont to explain the second main cause of greenflation.

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

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

The Desjardins economist cites as an example the sharp rise in the price of minerals such as lithium, essential for the production of electric batteries, the price of which has jumped 600% over the past three years.

“The demand for several metals necessary for the energy transition is set to increase sharply while the supply remains limited”, notes Marc-Antoine Dumont.

“To satisfy this growing appetite for metals, new mines will be needed. However, mining producers must also deal with a decreasing quality of minerals. [de mines existantes]which puts upward pressure on production costs as more energy is required” to extract these minerals.

How to mitigate the phenomenon?

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

Among other things, “for the first time, the costs of pollution will be integrated into the costs of production”. (For example by integrating the costs linked to carbon credits, compulsory recovery/recycling costs, etc.)

That said, according to Mr. Dumont, the risk of greenflation remains “avoidable” because it is “more associated with an uncoordinated green shift” among the authorities involved.

For example, “a transition [énergétique] late is more at risk of causing greenflationas the measures employed will introduce further distortions into the market”.

Also, anticipates the economist Marc-Antoine Dumont, “the more the transition [énergétique] is delayed, the greater the consequences of extreme weather events become”.

Therefore, he concludes, “continuing decarbonization efforts while maintaining a good calibration of public and monetary policies is essential in order to mitigate the risks associated with global warming and greenflation “.