Greenflation is Here, Painful, and Directly Proportional to the Speed and Depth of Decarbonization

 

     Greenflation, or decarbonization-induced inflation, is an indisputable fact of the energy transition. While there are many other causes of total inflation, the cost of decarbonization is one of them. As a currently unemployed energy professional, I can attest that inflation is painful. I have learned to be extremely cost conscious and to “pinch pennies.” I have no choice. Inflation affects the poor more simply because any increase in the cost of anything is a greater percentage of their income and/or assets.

     Environmental protection is a public good. In the same way greenhouse gas emissions reductions are a public good. However, these types of goods can only be achieved in wealthy societies since they are not primary goods associated with basic survival. They are costly and beyond the means of the poor. I first encountered the idea that environmental protection is higher on Maslow’s hierarchy of needs from the 2007 book Breakthrough: Why Saving the Earth Should Not Be Left to Environmentalists by Ted Nordhaus and Michael Shellenberger. This is based on psychologist Abraham Maslow’s pyramid of human needs where basic necessities like food, shelter, and clothing make up the base and more refined needs make up the higher sections. Environmental protection is up there near the top with self-actualization. In any case, it is well established that wealth correlates with environmental protection and greenhouse gas emissions reduction.

     It is also indisputable that decarbonization increases energy and power costs. The same is true of pollution abatement. Of course, we need both pollution abatement and decarbonization at certain levels. In the case of decarbonization we are faced with a need for speed according to the majority of climate scientists and climate policy wonks due to the possibility of dangerous impacts. Even so, that need for speed must compete with other human needs. There is another set of scientists and policy folks that think we can prioritize adaptation and keep the pace of decarbonization slow enough that phenomena like greenflation don’t outpace our capabilities to deal with cost increases. I am in that camp and I also think if we keep our natural gas and oil production and oil refinery capacity up, we can offset some of the greenflation with lower heating costs and lower fuel costs. There is abundant evidence that low natural gas costs have already offset and in effect masked rises in electricity prices due to higher grid penetration of renewables.  

     It is also no secret that wealthier individuals can and do take advantage of the vast majority of clean energy incentives available to individuals. When I had more money, I was able to get tax credits for a hybrid vehicle, a hybrid plug-in vehicle, and a set of rooftop solar panels. I can’t even consider something like that now. The bottom line here is that clean energy incentives to individuals don’t help the poor.

     In 2021 BlackRock CEO Larry Fink noted that policymakers are moving to phase out fossil fuels while demand for them is still growing, which he called an unsustainable endeavor. He also said this: “Short-term policies related to environmentalism in terms of restricting supply of hydrocarbons has created energy inflation, and we're going to be living with that for some time.” I don’t think that is wholly true because I think we can increase the supply of hydrocarbons to meet demand to keep prices reasonable. There are several factors that influence hydrocarbon prices: energy security issues as the Russian invasion of Ukraine showed, lack of investment (which is a feature of the aforementioned policies mentioned by Fink), and OPEC+ policies to keep prices high, to name a few.

     Renewables advocates used to say high fossil fuel prices are good because they make renewables more competitive. They often cite the societal costs of the negative externality of emissions as a true cost of fossil fuels, but that does not help the poor people who must pay more for them. I know that the costs of gas and electricity can be worrisome. If and when renewables begin to take up more of the power grid and EVs take up more of transport, then theoretically the cost of fossil fuels should drop as demand for them drops. That has not happened yet, and it is unclear if and when it will happen.

     In the meantime, in places where renewables are heavily pursued, incentivized, and mandated, electricity costs are often the highest. These are often also places where fossil fuels are higher priced such as Europe and California so renewables there are more competitive as well. The following section is from my 2022 book Natural Gas and Decarbonization.

 

 

Greenflation: We Can’t Escape It, But We Can Manage It Smartly

 

     The relationship between inflation and high fuel prices is generally pretty simple, although reasons can vary a bit. High fuel prices lead to higher prices for everything since everything uses fuel. High natural gas prices lead to high electricity prices. High oil prices make it cost more to fuel transport. In the case of electricity, the low natural gas prices of the past decade have masked rising costs from integrating renewables, storage, and other decarbonization measures, so that electricity costs have been steady. Underinvestment in oil and gas over the last few years has several causes: the 2020-early 2021 coronavirus drop in demand and low prices, the push to repay shareholders, avoidance of oversupplying the market, regulatory feasibility, competitive spending on decarbonization and other ESG considerations, and of course, commodity price volatility. In the US, as long as winters are not highly predictable there will be seasonal price volatility. Regulatory feasibility is a big uncertainty for big infrastructure projects like pipelines, LNG facilities, mines, and offshore projects, many of which have long time frames.

     In an interesting article in the Breakthrough Journal, Greenflation Is Real: Corporate Sustainability Has a Price, and Environmentalists Must Take It Seriously, sustainability policy analyst Michael Moran writes that net-zero pledges and ESG commitments will likely lead to inflation. If companies must spend more money on decarbonization that is not profitable or less profitable, which it is by nature, aside from efficiency investments with good payback times, then their profit margins will shrink, their overall costs will rise, and they will pass those costs onto their customers. Higher prices are no fun if your own margins are thin. It may turn out to be good that post-COVID inflation is giving us a taste of higher prices the likes of which we have not seen for some time, as it can give us pause for over-spending in the near term on accelerating decarbonization, which is likely to bring more inflation in the future. He writes: “Dismissing outright the likelihood of disruption or inflation as the world transitions away from carbon is just not credible.” Just a glance at household electricity prices vs. electricity generation sources shows a direct relationship between renewables on the grid and electricity prices. Other cost increases beckon for commodities like critical minerals and rare earth elements if decarbonization accelerates too quickly. Supply chain disruptions are also much more likely in an accelerated scenario.

 

 

Greenflation Will Endure but There Are Some Ways to Slow the Bleeding

 

     While many of the causes of the current cycle of inflation will ease in time, greenflation will not. It will continue as long as clean energy is more expensive than fossil fuels. Until then, it is inescapable. Many sources point out that the cost of green energy like wind and solar is less than the cost of fossil fuels. While there is some truth to that if you look at it in a certain way, if it were really true there would not be greenflation. Solar and wind make cheaper electricity due to massive subsidization, by being given primacy on grids when available, and by slightly lower lifetime costs. However, upfront costs are significantly higher, and the costs of ensuring system reliability and integrating onto the grid systems more than offset the lower power production costs of them when they are available. Greenflation has also had social impacts such as protests against carbon taxes on fuel. This happened in 2018 with the yellow vest protests in France and similar backlash has since occurred in many other countries. Only some can afford these taxes. One issue put forth is fuel vouchers for those who qualify economically but such measures require additional management and bureaucracies to keep them functional. Some favor more direct economic redistribution measures like dividends to the “have-nots.” There have long been advocates of revenue-neutral carbon taxation that aims to subsidize consumers who must buy greener energy. Of course, conservatives in the U.S. would call such schemes more entitlement spending. In the past, I would have more or less agreed with them that this is not the answer but now I tend to take an interest in anything that would put more money in my empty pockets. Of course, one of the best and most sensible ways to keep greenflation from getting out of hand is to keep the energy transition at a reasonable pace. However, that is difficult with all the net zero pledges and chatter about the climate crisis and the climate emergency.     

 

 

Source: Greenflation: The Achilles Heel of the Green Economy? Paul Pernot. Council on Business & Society Insights. June 8, 2022. Greenflation: The Achilles heel of the green economy? – Council on Business & Society Insights (cobsinsights.org)

Examples of Greenflation Abound

 

     There are endless examples of greenflation. Here are a couple of recent ones:

 

While the cost of solar and wind energy had been dropping steadily over the last few decades, that trend discontinued beginning in 2021. From 2021 to 2023 the levelized cost of electricity (LCOE) for offshore wind shot up from $77.30 per MWh to $114.2 per MWh. This has made some projects uneconomical to continue and others are doing power purchase agreement renegotiations. The New York State Energy Research and Development Authority (NYSERDA) estimates that renegotiations alone will lead to 4% increases, or $4.67 per month increases, for power customers. Solar costs and onshore wind costs have gone up as well. There are multiple reasons for these cost increases including supply chain disruptions, cost increases of materials and metals, regulatory costs, and logistical issues.

     In January 2024 the EU’s emissions trading system (ETS) is set to be extended to the shipping industry. While shipping has been decarbonizing through several means over the past decades: lower sulfur fuel requirements, LNG replacing diesel, hydrogen fuel cells, methanol, ammonia, some electrification, and diesel-electric hybrids, there is still a long way to go. As shipping is included as a cost in the transport of a large amount of goods and a wide variety of goods, this is expected to add to inflation in the EU. This will undoubtedly contribute to inflation, said Bertrand Chen, CEO of the Global Shipping Business Network, who was speaking at CNBC's East Tech West conference. The ETS is effectively a carbon tax that will be passed down to consumers as all such taxes are.

   

 

References:

‘No question’ that the decarbonization of shipping will contribute to inflation, says industry CEO. Lucy Handley. CNBC. October 18, 2023. ‘No question’ that the decarbonization of shipping will contribute to inflation, says industry CEO – NBC New York

Egan, Matt, October 27, 2021. Energy crisis will set off social unrest, private-equity billionaire warns. CNN. Energy crisis will set off social unrest, private-equity billionaire warns | CNN Business

Moran, Michael, November 30, 2021. Greenflation Is Real. The Breakthrough Journal No. 15, Winter 2022. The Breakthrough Institute. The Breakthrough Institute | Greenflation Is Real: Corporate…

As Orsted, others seek up to 71% hike in clean energy contract prices, NYSERDA warns of rate increases. Ethan Howland. Utility Dive. August 31, 2023. As Ørsted, others seek up to 71% hike in clean energy contract prices, NYSERDA warns of rate increases | Utility Dive

Greenflation: The Achilles Heel of the Green Economy? Paul Pernot. Council on Business & Society Insights. June 8, 2022. Greenflation: The Achilles heel of the green economy? – Council on Business & Society Insights (cobsinsights.org)

Natural Gas and Decarbonization: Key Component of the Lower Carbon, Reasonable Cost Energy Systems of the Future: Strategies for the 2020s and Beyond. Kent C. Stewart. March 2022. Amazon Publishing.