ANALYSIS-Climate change: the new inflationary puzzle of central banks

* BoE’s bailey signals risk of messy transition

* Sudden political shifts could fuel energy and commodity prices

* The transition could also bring productivity, job gains

LONDON, June 8 (Reuters) – For Andrew Bailey, director of the Bank of England, tackling climate change carries inflation risks if you do too little and too late. For Larry Fink, boss of investment giant BlackRock, the risk is to go too fast.

Who is right ? The answer will depend on how policymakers, investors and consumers adapt to the complex set of variables that will somehow disrupt the global economy in the not-so-distant future.

World leaders will travel to Glasgow in November to have the United Nations talks chart a smooth course towards 2050, the agreed deadline to reduce global warming emissions to ‘net zero’ and cap global temperatures at 1, 5 degree Celsius above pre-industrial standards.

For Bailey, the longer they wait to adjust policy to new realities, the greater the economic cost of that adjustment.

“And a messy transition, where tougher policies are introduced later in the horizon to compensate, could lead to both weaker growth and higher inflation due to rising energy and material costs. in the economy, “he told a Reuters event last week.

Fink, on the other hand, focused on the cost of too hasty a transition. He warned, by way of example, that a rapid greening of policies would increase the cost of air fuels and therefore the price of plane tickets, the Financial Times said in quoting his comments.

The question, he said, was whether regulators and governments “accept more inflation to go green.”

Such a compromise can be uncomfortable for those who already fear that unprecedented levels of pandemic stimulus will end up overheating the global economy.

$ 160 CARBON

Many economists would agree that climate policy can drive up prices because the current price of carbon does not reflect its true environmental cost. Thus, any policy seeking to reflect this cost would tend to drive up prices.

It could be dramatic. A scenario released Monday by major central banks said reducing emissions to net zero by 2050 would require a carbon price of $ 160 per tonne – more than three times the price of the current tradable benchmark. in Europe – by the end of this decade.

“The transition to net zero – and, more generally, to a more sustainable world – is likely to have an inflationary impact,” said Silvia Dall’Angelo, Senior Economist, International Affairs at Federated Hermes.

On the other hand, there is both the possibility that climate change policy may in fact lower the prices of certain goods and services and the risk that doing nothing at all may stimulate other inflationary pressures associated with a change. faster climate.

Here, central bankers whose main job is to keep prices stable find it difficult to come up with precise and quick numbers.

A European Central Bank (ECB) document last year noted that climate change and the policies to deal with it could have unpredictable effects on inflation, even to the extent that it could undermine policy efforts. monetary policy to keep prices stable.

Extreme weather events leading to storms, floods and crop failures all have the potential to drive up food prices, while commodity prices can also rise as desertification and the rise in the level of the earth. sea ​​create land shortages, he said.

On the positive side, he suggested that better fuel efficiency could lower household heating bills and that more efficient vehicles could lower fuel costs – a benefit that would obviously be eroded if fossil fuels were also taxed more heavily.


ECB President Christine Lagarde told a CFOs meeting on climate change last week that the main issue was how to accurately fit these longer-term factors into the narrower window of 2 at 3 years used by central banks for their forecasts.

“A lot of heavyweights in the modeling world are looking at that,” she said. At the same meeting, U.S. Federal Reserve Chief Jerome Powell agreed the issue has complex implications not only for prices, but also for jobs, productivity and interest rates.

Vulnerable developing economies have been feeling the impact of climate change on their agriculture and other sectors for years. Today, wealthy economies are starting to see pricing challenges related to weather events and climate change policy, according to Katharine Neiss, chief European economist at PGIM Fixed Income.

She cited as examples the reduction in water flow that obstructed major supply routes such as the Rhine in 2018, as well as the banning of diesel cars in a number of European city centers, leading to a sharp drop in fuel consumption. used diesel car prices. and the growing demand for electric vehicles.

“A disorderly transition to net zero could result in more volatile and higher average inflation, which would impact the ability of households and businesses to plan, leading to sub-optimal savings and investment decisions. “, she warned.

Ultimately, the climate challenge involves massive changes for the global economy in any case – and rising inflation may be the least of our concerns.

If no effort is made to address it, the global fallout would result in a cumulative loss of global production of nearly 25% over the next two decades, estimated Wei Li, Global Chief Investment Strategist at BlackRock Investment Institute.

On the other hand, Jean Pisani-Ferry, a French economist who modeled climate scenarios, estimated that the impact on the world economy of a rapid shift to true sustainability would be akin to the upheaval of the oil crisis. of 1973, which at the time triggered a prolonged period of runaway inflation.

Counteracting such a shock would be even more difficult this time around, he argued, as economies would have to invest not only to make the transition, but also to compensate for the loss of existing capital stock as fossil fuel resources grow. find themselves blocked.

Others say it’s a challenge that brings opportunities.

Nicholas Stern, who produced a landmark 2006 report on the economics of climate change, argued that the investment that a future green economy would need for new forms of production could provide an attractive home for the savings stock. global.

“If we do it right, this is the story of 21st century growth,” he told the CFOs conference. (Additional reporting by Balazs Koranyi in Frankfurt; Editing by Emelia Sithole-Matarise)

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