Climate-Related Inflation: A New Age of Energy Inflation

Written by: Angie Christina & Aljendro Jongkamto

Designed by: Ahmad Faraby

Net zero has been a key goal for the world in the past two decades because greenhouse emission has increased and the earth's temperature has increased 1.1 degrees celsius since the 1800. By 2030, emission should decrease by 45 percent, following the target of NZE (net zero emission) by 2050. Various policies around the world have direct companies to achieve these goals. China has implemented decarbonization policies to cut energy intensity by 3 percent in 2021 and have also encouraged low-carbon corporate strategies in state owned enterprises. The UK has implemented net zero strategies such as ending the sale of petroleum and diesel cars by 2030. Although different countries are designing different policy mixes, most of them accept that a rising cost of carbon emanations is needed to achieve net zero.

However, the transition from brown to green energy has a significant impact towards the surging global inflation. Being highly dependent on fossil fuels, government's spending focused on a cleaner economy has also taken a toll on supply chains causing an increase in price. The unmatch between supply and demand has led us to experience what is called climate-related inflation.

Climate-related inflation is divided into 3 groups: climateflation, fossilflation, and greenflation. Climateflation is caused by the extreme climate events that have led to severe droughts all over the world causing prices to rise. Events such as extreme heat, floods and many natural disasters have affected the ecosystem dependent sector. The second group, fossilflation, is caused by the high dependency on fossil fuels but shortage in the supply chain causing prices to increase. Decreased investment in the oil and gas sector has become a way to reduce economies exposure to fossil fuels. Investment in oil and gas throughout 2022 and 2023 should not exceed 380 billion USD and to keep it that way the government has implemented carbon taxes to navigate the progress. Last, greenflation is inflation caused by imbalance between rising demand and constrained supply in many critical commodities to comply with climate objectives. Copper, nickel, aluminium, and other minerals are essential for renewable technologies such as electric cars and wind or solar powers. Investment in these metals has been depressed caused by environment and government issues.

These three climate-related inflation are of different nature, but all have the same consequences: increasing in price. Climateflation, fossilflation, and greenflation help figuring out climate-associated inflation drivers and answers. This climate-related inflation pushes for extra investments in less carbon extensive technologies for heating, industries, transportation and strength causing inflation in multiple areas.

However, climate-related inflation caused by net zero policies. In the long run, it is still questionable whether the prices will fall or will it continue to rise. When do you think climate-related inflation will stop? Will it continue throughout the net zero process or will it decrease over time?