Fighting inflation with climate action
Democrats made the largest ever expenditure by the United States this weekend to slow global warming, but you wouldn’t necessarily know it had anything to do with the climate from the name of the measure.
The $370 billion dollars — designed to move the country away from fossil fuels and toward solar, wind and other renewables — is dubbed the Inflation Reduction Act and is expected to be passed by the House this week. (In case you don’t remember, Senator Joe Manchin III cited inflation as a major reason for not supporting an earlier draft of the bill.)
The name is actually fitting because there is a direct link between climate change and rising prices no matter where you are in the world. Today I’ll explain that link and talk about how those billions in spending in the future could actually help reduce inflationary pressures, not increase them.
The ‘fossiflation’ problem
Fossil fuels are subject to abrupt changes in supply, and those changes can trigger shocks in energy markets that fuel inflation around the world. We’re seeing that now with the Russian invasion of Ukraine, and we’ve seen it before. For example, in the late 1970s, sharp declines in Middle Eastern oil exports caused energy prices to rise in the United States. On a certain moment, inflation rose to 9 percent.
In the summer of 1979, President Jimmy Carter… solar panels installed on the roof of the West Wing of the White House. The gesture was symbolic. Carter and his advisors knew that investing in renewable energy was one way to protect consumers from inflation.
That’s because, unlike oil and gas, wind and sunlight are free (although the power plants they use are expensive to build). And even though there are cloudy and windless days, stocks are not subject to geopolitics.
“For fossil fuels, most of the costs are the raw material. It’s the operating costs, the fuel,” said Gernot Wagner, a climate economist at Columbia Business School. “With renewable energy, it’s the exact opposite, in that it’s primarily the solar panel that costs a lot. And once it’s installed, you’re basically printing money.”
What ever happened to those White House solar panels? Carter lost the 1979 presidential election in a landslide and his successor, President Ronald Reagan, had them removed in 1986. now kept at the National Museum of American History.
The risks of delay
The transition to cleaner energy takes time. The less time you have, the greater the chance of economic disruption.
For example, if countries cut back fossil fuels sharply before cleaner energy sources, such as wind and solar, are fully developed, the imbalance is likely to push prices up. Likewise, consumers may want to buy new products, such as electric cars, that are not yet available in large numbers. Again, the imbalance will most likely lead to higher prices.
“These are the risks arising from the measures taken by governments to transition to a greener economy, such as a carbon tax, green technological innovations or changing consumer preferences for greener products,” said Irene Heemskerk, head of the European Central Bank’s Climate Change Center. .
But walking slowly in the energy transition is not the answer. Heemskerk told me that these risks mean that countries must act early and decisively for an orderly transformation that does not lead to significant price increases.
If countries are forced to restructure energy markets in a desperate struggle, forced by more devastating fires, floods and heat waves, the subsequent economic disruption will most likely be accompanied by high inflation and other economic problems.
In other words, the sooner, the better.
The rising costs of extreme weather
Floods can disrupt crops, causing food prices to rise sharply. Hurricanes can damage power plants and cause energy shortages. And extreme heat can make workers less productive.
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Economists still don’t fully understand the ways these disruptions could ripple inflation through our globalized economy. Heemskerk said central bank officials around the world are still studying the economic consequences of various forms of extreme weather resulting from climate change.
But they know the effects can be surprising.
For example, do you think a drought in Taiwan could affect the auto industry in the United States? that is exactly what happened last year. Computer chip manufacturers need water for the manufacturing process. Taiwan is a major supplier of chips, so a drought there contributed to a shortage that severely hampered the auto industry.
For now, economists I’ve spoken to agree that the effects of climate change on inflation tend to be regional. But the more our planet warms, the more risks the global economy faces.
The latest consumer price data will be released on Wednesday. The new numbers will tell us if the highest inflation rate in the United States in more than four decades is beginning to subside.
When reading the report, keep the climate connection in mind.
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Thank you for reading. We’ll be back on Friday.
Claire O’Neill and Douglas Alteen contributed to Climate Forward.
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