Fighting Inflation With Climate Action
Democrats this weekend muscled through what would be the biggest expenditure ever by the United States to slow global warming, but you wouldn’t necessarily know from the name of the measure that it had anything to do with climate.
The $370 billion bill — designed to move the country away from fossil fuels and toward solar, wind and other renewable energy — is called the Inflation Reduction Act, and it’s expected to pass the House this week. (In case you don’t remember, Senator Joe Manchin III cited inflation as a big reason for not supporting an earlier version of the bill.)
The name, in fact, is fitting because there’s a direct connection between climate change and rising prices, no matter where you are in the world. Today I’ll explain that link and talk about how the those billions in spending could actually help reduce, not increase, inflationary pressures in the future.
The ‘fossilflation’ problem
Fossil fuels are subject to abrupt changes in supply, and those changes can cause shocks in energy markets that fuel inflation around the world. We’re seeing that now with the Russian invasion of Ukraine, and we’ve seen it before. In the late 1970s, for instance, sharp reductions in Middle Eastern oil exports made energy prices surge in the United States. At one point, inflation rose to 9 percent.
In the summer of 1979, President Jimmy Carter had solar panels installed on the roof of the White House West Wing. The gesture was symbolic. Carter and his advisers knew that investing in renewable energy was one way to shield consumers from inflation.
That’s because wind and sunlight, unlike oil and gas, are free (though the power plants that use them are expensive to build). And, even though there are cloudy and windless days, supplies aren’t subject to geopolitics.
“For fossil fuel, most of the expense is the commodity. It’s the operating expenses, the fuel,” said Gernot Wagner, a climate economist at Columbia Business School. “With renewables, it’s the exact opposite, in the sense that it’s the solar panel initially that costs a lot. And once installed, you’re basically printing money.”
What ever happened to those White House solar panels? Carter lost the 1979 presidential election in a landslide and his successor, President Ronald Reagan, had them removed in 1986. One panel is now preserved in the National Museum of American History.
The risks of delay
The transition to cleaner energy needs time. The less time you have, the higher the risks of economic disruption.
For example, if countries sharply reduce fossil fuels before cleaner sources of power, like wind and solar, are fully developed, the imbalance will probably make prices go up. Similarly, consumers might want to buy new products, like electric cars, that are not yet available in large numbers. Again, the imbalance will very likely lead to higher prices.
“Those are the risks stemming from the measures governments take to transition to a greener economy such as a carbon tax, green technological innovations or changing consumer preferences for greener products,” said Irene Heemskerk, who heads the European Central Bank’s climate change center.
But slow-walking the energy transition isn’t the answer. Heemskerk told me that these risks mean that countries need to act early and decisively for an orderly transformation that won’t lead to sharply price increases.
If countries are forced to restructure energy markets in a desperate scramble forced by more devastating fires, floods and heat waves, the subsequent economic disruption will very likely involve high inflation and other economic problems.
In other words, the sooner, the better.
The increasing cost of extreme weather
Floods can disrupt crops, sharply increasing food prices. Hurricanes can damage power plants and cause energy shortages. And extreme heat may make workers less productive.
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Economists still don’t fully understand all the ways these disruptions might cause inflation to ripple through our globalized economy. Heemskerk said that officials in central banks around the world were still studying the economic consequences of various forms of extreme weather driven by climate change.
But they know the effects can be surprising.
For example, do you think a drought in Taiwan could affect the auto industry in the United States? That’s exactly what happened last year. Computer chip manufacturers need water for the manufacturing process. Taiwan is a major supplier of chips, so a drought there contributed to a shortage that seriously hobbled the auto industry.
For now, economists I’ve spoken to agree that the effects of climate change on inflation are usually regional. But the more our planet warms, the more risks the global economy faces.
The latest consumer price data, by the way, is coming out on Wednesday. The new numbers will tell us whether highest inflation in the United States in more than four decades has started to recede.
When you read about the report, keep the climate connection in mind.
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Thanks for reading. We’ll be back on Friday.
Claire O’Neill and Douglas Alteen contributed to Climate Forward.
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