Bloomberg: Greenflation is very real and, sorry, it’s not transitory
Advocates of wind and solar power often tell us that these energy sources will result in lower energy prices, but the facts on the ground do not support this claim. Whether it’s California, Germany, or Minnesota, spending billions of dollars on renewables has led to higher electricity rates, which in turn are leading to inflation, or “greenflation.”
This reality is beginning to be discussed on a global scale. Javier Blas, an opinion writer at Bloomberg, recently noted that the tone when discussing the “energy transition” has shifted away from the idea that wind and solar will reduce energy costs. Now, even some renewable energy supporters are starting to admit that overreliance on these energy sources will fuel inflation.
The energy transition debate has been largely dominated by this line of argument: Green energy is needed to address climate change, and households and business will benefit from it via lower prices. On Saturday, Isabel Schnabel, an influential member of the executive board of the European Central Bank, articulated another line of thought: the transition is needed, but’s likely to prove inflationary.
Schnabel, a German economist, argued that greenflation is very real and, not only is it not transitory, it’s likely to get worse. Central banks will need to react to it. Speaking at an ECB virtual panel over the weekend, she said: “While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement.”
The comments signal a re-think among policymakers about the energy transition — already evident within the Biden administration, but now apparently spreading into Europe.
Energy prices are rising because governments in the European Union have restricted the development of fossil fuels while pretending that wind and solar are able to pick up the slack. They cannot. According to Schnabel:
“At present, renewable energy has not yet proven sufficiently scalable to meet rapidly rising demand… The combination of insufficient production capacity of renewable energies in the short run, subdued investments in fossil fuels and rising carbon prices means that we risk facing a possibly protracted transition period during which the energy bill will be rising. Gas prices are a case in point.”
To be sure, Schnabel isn’t suggesting that governments should slow down the fight against climate change. She’s warning, however, that the transition will have unintended consequences. Until now, the ECB had focused mostly on the impact of climate change on financial stability, including the effect of stranded oil and gas assets, rather than on the consequences of the energy transition itself.
There are enormous costs associated with shutting down reliable, affordable coal and nuclear power plants and pretending that wind and solar can replace them.
Electricity prices in Europe are skyrocketing, and natural gas prices are following suit because the EU has become overly reliant upon gas imports to generate electricity. On top of that, gasoline prices in Europe are rising rapidly as global demand surges and supply is failing to keep pace. The results are energy induced inflation:
Greenflation will have fiscal and monetary consequences, Schnabel argues. Governments will need to support the families left behind as energy prices soar. She didn’t say much about businesses, but it’s clear that if Europe lets rising gas and electricity prices go unchecked, the region would lose its energy-intensive industries — from aluminum smelters to fertilizer producers. Central banks may have to abandon their traditional attitude of looking through energy price increases because the transition is likely to mean, on balance, both higher aggregated demand — via investment in green alternatives to fossil fuels — and also higher inflation.
In that regard, Schnabel is much closer to what officials think in Washington than in Brussels and at the International Energy Agency. For months, the European Commission has played down the risk around the energy transition, seeing only positives. Fatih Birol, the head of the IEA, has done largely the same.
The energy policies pushed by liberal wind and solar advocates are about to garner the scrutiny they always deserved. Rising costs will give the public the permission it needs to reevaluate the received wisdom that wind and solar will bring down prices, and when people learn that they have been deceived, they will be very unhappy.