Green inflation? No, price rise ‘brown’ | Business

Green inflation (from the English neologism greenflation) is the acceleration of consumer prices triggered by the increase in the cost of products linked to the transition towards an economy without carbon emissions, both for those that must be stopped using (such as energy from fossil sources) and for those that must be promoted (such as renewable).

Regarding the former, making them more expensive is the most effective measure to eliminate them and stop using the atmosphere as a sink for greenhouse gases. The carbon tax, explicit (rate per ton emitted, emission right acquired in the market) or implicit (through regulations), would make the use of fossil energy and carbon-intensive products more expensive. Demand is disciplined due to the negative impact on disposable income, favoring spending on less polluting options, and supply is encouraged, with R&D and new investment, to seek production processes without emissions. In addition, the redistribution of income from the carbon tax is key to mitigating the regressive effects on income in the most vulnerable households and companies, or to favor green investment.

Just as oil price increases due to embargoes or wars in the 1970s were not enough to sustainably accelerate inflation in importing economies, given the reaction of economic policy, neither is it most likely that the increase in the cost of inputs and brown consumer goods trigger a widespread and sustained acceleration in consumer prices. The energy transition is not going to change the economic policy of nominal stability: fiscal policy without recourse to monetary financing, independent central banks to pursue price stability, and explicit inflation targets. Anchoring long-term inflation expectations with the current uncertainty is a stress test for the credibility of central banks.

With regard to the increase in prices due to the greater demand for green products, such as raw materials in which they are intensive (copper, lithium), price increases can be expected given the slow response of production to the increase in demand. In addition, according to the International Monetary Fund, increases in the prices of green raw materials can be very prolonged over time if net zero emissions are sought in 2050, although there may be efficiency gains in the use of these raw materials, just as there have been in oil. For example, the US consumes for each unit of GDP a third of the oil it used 50 years ago. All in all, it is key to safeguard the anti-inflationary credibility of economic policy, especially when a large part of the climate policies, which will govern the transition, are yet to be implemented.

J. Julian Cuberofrom BBVA Research.