Green transition policies could have effects on inflation through higher energy and industrial input prices, whether caused by increases in the price of carbon, by regulations or by tensions over critical minerals needed for renewable energy. Green transition policies could also affect inflation through delays in the relative price adjustment of energy-intensive goods, or through economic disruptions linked to the restructuring and adaptation of the productive system. On the whole, the magnitude and duration of the effects of the transition to carbon neutrality on inflation will depend on the transition strategy chosen. While a number of short and medium-term scenarios risk being inflationary, there are also factors that could curb inflation. Moreover, the earlier and more gradually the transition is implemented, the lower the inflation costs will be.
The sixth assessment report of the United Nations Intergovernmental Panel on Climate Change (IPCC), published in 2022, states that human-induced greenhouse gas emissions have continued to increase over the decade 2010-19. The recent delays in implementing climate actions have heightened the risk of an abrupt and disorderly green transition, which would have major consequences for both growth and inflation.
Raising the price of high-carbon goods and services in relation to that of other goods and services is desirable in order to send a dissuasive signal to consumers and encourage them to use alternative, decarbonised products that generate low greenhouse gas emissions. However, it could also result in more inflation. This phenomenon, known as “greenflation”, reflects the difficulty of redirecting resources towards sustainable activities in the short and medium term, as well as the persistent effects of successive energy price shocks on inflation expectations.
Necessary increases in the price of fossil fuels
The effects of the green transition on consumer prices will be felt first and foremost as the direct impact of higher energy prices. Demand for fossil fuels (oil, gas and coal) is expected to decrease gradually with the transition to a low-carbon economy, which may lead to global price reductions. But if the energy mix does not change significantly, an ambitious carbon pricing policy will make using fossil fuels more expensive for the final consumer and increase the price of energy. The scenarios presented by the Central Banks and Supervisors Network for Greening the Financial System (NGFS, 2022) explore a number of possible transition trajectories, varying in ambition, and their different effects on fossil fuel prices. The scenarios for the price of oil (see Chart 1) show fairly rapid increases in France, notably as a result of the rise in the explicit and implicit price of carbon.
Short-term pressures on the price of electricity and critical metals
The global price of carbon (price of a tonne of CO2 emitted into the atmosphere) in 2021 was around USD 10 per tonne (Pisani-Ferry, 2021). The NGFS scenarios where warming remains below 2°C project carbon price trajectories of between USD 200 and USD 800 per tonne by 2050,3 which could lead to increases in the end-price of electricity, depending on how it is produced. Under the current European wholesale market setup…
Updated on: 05/04/2023 17:44