The delay in the energy transition is a harbinger of market distortions that are set to increase and of extreme weather events that will intensify. One of the great economic consequences of this puny action bears the name of greenflation.
This “green inflation” comes from an imbalance in the form of a lower supply than demand caused by global warming. The price increase generated will gain in magnitude and duration the more the energy transition will accumulate delays.
Economist Marc-Antoine Dumont, of the Mouvement Desjardins, made an “Economic point of view” of it published in June. It addresses, from the outset, a first direct cause of greenflation : extreme weather events destroying or seriously damaging production sites and capacities. The number of such episodes of supply destruction has surged over the years, and their frequency is not set to slow. “The number of natural disasters recorded in the last 50 years has tripled,” he points out.
The United Nations Office for Disaster Risk Reduction has also referred to a “spiral of self-destruction”. In his report, he notes that these disasters resulting from human-induced climate change – and from an underestimation of the risks, which leads to inadequate action – are multiplying at great speed. If between 350 and 500 disasters of medium and large scale events have occurred every year for the past two decades, that number is projected to rise to 560 per year — or 1.5 per day — by 2030. Disasters whose scale and intensity are increasing. The economic, human and ecological consequences are colossal, if only on raw materials, such as the drop in yields of certain agricultural crops such as corn, rice and wheat. “Thus, the costs associated with combating this cause of greenflation increase more than the energy transition is slow to take place”, adds Marc-Antoine Dumont.
Added to this direct cause is the effect of the energy transition on the demand for strategic metals and other inputs making up a supply that is still limited. In its scenario of achieving carbon neutrality by 2050, the International Energy Agency estimates that investment must quadruple by 2030. Such growth could have inflationary effects on the inputs needed to go green, retains the economist. “The figures show an imminent gap between increased global climate ambitions and the availability of critical minerals essential to achieve these ambitions”, has already indicated the Director General of the Agency, Fatih Birol. “Geographic concentration, [temps] to implement new mining production, declining quality of resources in certain regions, environmental and social impacts [des mines]…” add to the many supply challenges.
Downstream, the massive deployment of electric vehicles and renewable energies requires industrial production capacity and technologies that are not yet optimized. Production costs therefore remain high.
Pricing and regulations
are added to the greenflation government intervention in the form of carbon pricing and tightening of environmental regulations. In the first case, many of the analysts maintain that reaching emission targets cannot be achieved without an increase in pricing. Delayed intervention would require a more abrupt transition and would have stronger macroeconomic impacts. In particular, it would lead to a steeper increase in the theoretical price of carbon to obtain the same effect on climate change.
In the second, “favouritism for sustainable investment and changes in certain public policies, such as the tightening of environmental regulations, could restrict supply,” writes Marc-Antoine Dumont. By way of illustration, it uses an oil projection from the International Monetary Fund, for which using only restrictive measures on supply would lead to a growth of around 170% in crude prices between 2022 and 2030.
Finally, we cannot assume that a demand for so-called green goods and services is accompanied by a proportional reduction in demand for polluting products. For example, the Canada Energy Regulator calculates that better consumer awareness of their carbon footprint and government measures such as the carbon tax will reduce final domestic demand for oil by 10% between 2019 and 2030. This should not prevent the Canadian oil sands industry from posting production of more than 3.5 million barrels per day at the turn of 2030, forecasts IHS Markit, or 500,000 barrels per day or 17% of more than at present, essentially in an effort to fill the supply vacuum created by the sanctions against Russia.
Globally, global oil needs will increase by 14% in the meantime, according to the US Energy Information Administration. “We then find ourselves in a situation where demand remains strong for polluting and clean goods and services,” writes the Desjardins economist.