Transition to net-zero can affect inflation in 3 ways

Oil&Gas Materials 22 September 2021 17:36 (UTC +04:00)
Transition to net-zero can affect inflation in 3 ways

BAKU, Azerbaijan, Sept.22

By Leman Zeynalova – Trend:

A gradual transition to ‘net-zero’ emissions would have a modest impact on inflation but could still make life more difficult for central banks if it happened at a time when other pressures were building, Trend reports with refence to Capital Economics, a UK-based research and consulting company.

According to the scientific consensus, the world will need to reach net-zero emissions by 2050 to limit the rise in global temperatures to 1.5-2.0°C and avoid the worst impacts of climate change. More than 120 countries have so far pledged to reach this target and some are aiming for a shorter time-horizon (e.g. Finland has set a target of 2035).

“This transition to net-zero emissions is a potential source of inflation that is often overlooked. Achieving this target will require new policies aimed at mitigating climate change. Broadly speaking, there are three channels through which the transition to net-zero could affect prices and inflation. First, prices could be directly impacted by policies that create an explicit price for carbon emissions, such as emissions trading schemes and carbon taxes. The goal of these is to ensure that prices also reflect the social cost of pollution.

Second, inflation could be boosted indirectly by environmental regulations that have an adverse impact on supply. For example, the introduction of efficiency standards or the outright ban on using specific products could raise firms’ costs or force them to scrap carbon-intensive capital prematurely. Third, increased investment by the private or public sector on green measures could raise demand for specific goods or commodities and lead to higher inflation if it came at a time when supply capacity was constrained,” said the company.

Capital Economics believes that if policies along all these lines were introduced abruptly in order to bring down emissions very quickly, then the impact on inflation could be quite significant.

“Take carbon pricing for example. Only 21.5% of global greenhouse gas emissions are covered by carbon taxes and emissions trading systems today. (See here.) What’s more, where such schemes are in place, the carbon price is typically too low. The IMF estimates that the average price globally is around $3 per tonne and that it needs to be $75 per tonne by 2030 to be on track to limit the rise in global temperatures to 1.5-2.0°C.

A repricing of global CO2 emissions by this magnitude would increase their aggregate cost by the equivalent of 3 percent of world GDP. This would be similar to the repricing of oil consumption during the first oil price shock in the 1970s, which contributed to global inflation leaping from around 8% to 14%. Meanwhile, a report by the World Economic Forum suggests that removing emissions from companies’ supply chains would boost end costs to consumers by 1-4 percent. However, as things stand, measures are due to be introduced gradually, so the impact on inflation in any one year is unlikely to be especially big.”


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