Subscribe to Economic Trends & Insights
Greenflation: Unwelcome Growth
The transition to clean energy will bring higher costs.
Transitions between major energy sources are not new for the global economy. The first attempt began in earnest in the 1700s as the world moved from biomass to fossil fuels. Two centuries later, oil and gas became the primary global energy source. However, unlike past transitions, the current changeover to green energy is unparalleled, urgent and inflationary.
The threats and consequences related to climate change are greater than ever. Building a less carbon-intensive economy has led to increased government spending, and increased demand for green metals such as copper and aluminum due to their usage in wind and solar panels. At the same time, all major sources of energy are in short supply. The outcome has been greenflation: higher energy, minerals, and metal prices.
Output and capacity of renewable energies remain inadequate. Tighter regulation (or expectations of regulations to come) is leading to lower investments in fossil fuels and raw material supplies across all economies. Global investment in oilfields and mines has dropped sharply in recent years. China has cut production of steel and iron ore to move towards carbon neutrality. Significant public and private investments will be needed to meet growing demand for renewables.
Ensuring adequate supplies of the materials needed to generate greener energy will be a difficult balancing act. Solar and wind power plants use up to six times more copper than conventional power generation. Electric vehicles use over six times more minerals than their conventional counterparts. That said, both make up for the higher up-front impact through lower emissions over their full lifecycle.
Greenflation could make the transition to clean energy expensive.
Worryingly, most green commodities such as copper, aluminum, and lithium (the most important inputs for clean energy) aren’t really that green. Lithium is a key component for manufacturing rechargeable batteries, but its extraction causes air contamination. Similarly, aluminum, a vital metal for solar and green projects, is one of the dirtiest metals to extract and refine. Efforts to make acquiring these elements greener will serve to make them more expensive, as well.
Supply gaps, coupled with rising carbon prices, imply the world could be in for a prolonged period of elevated energy costs, posing a risk to consumers, businesses and central banks’ price stability objectives. If supply constraints do not ease, there is a risk that the cost of green energy will simply make the transition unaffordable for many societies. Climate goals would be out of reach.
The world must find a way to balance the need to cut emissions with the environmental impact of the materials needed for “green” energy. Otherwise, the effort could weaken the very goal it seeks to attain.
Don’t miss our latest insights:
Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.
© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/terms-and-conditions.