Greenflation Is the Latest Climate Term on Our Jargon Watch List

A recent article in The Atlantic is titled "The Rise of Greenflation" with the subhead "Extreme weather and energy uncertainty are already sending prices soaring." Reporter Robinson Meyer discusses how lumber prices are going through the roof because of climate change and that weather disasters are causing problems across the supply chain of food, fuel, water, and other commodities, causing prices to rise for just about everything these days.

But is this "greenflation"? One could quote Inigo Montoya in "The Princess Bride": "You keep using that word, I do not think it means what you think it means." But Meyer does not keep using that word. It only occurs in the headline, which he probably didn't write.

Greenflation as a term has been around for a while, but it has not been used to describe the increase in the costs of climate change as The Atlantic does, but instead, the increase in costs to deal with climate change. Greenflation is considered to be the cost of the energy transition, which is going to be a lot less than the cost of climate change.

Greenflation is real and it's a problem: The prices of copper, aluminum, and lithium, all needed for the energy transition from fossil fuels, have all spiked in the past year. "Green" aluminum costs more than the regular stuff, and while Apple can afford this, other companies cannot. Ruchir Sharma describes the problem with copper in The Financial Times:

"Renewable technologies require more wiring than the fossil-fuel variety. Solar or wind power plants use up to six times more copper than conventional power generation. Over the past 18 months, as governments announced new green spending plans and pledges, analysts steadily increased their estimates for growth in demand for copper. Green regulation is thus spurring demand as it tightens supply, fuelling greenflation."

Greenflation will make it harder to make the energy transition from fossil fuels because the cost of electric cars and green energy won't drop as quickly as was hoped. There has been a "green premium" that some have been willing to pay; I pay a premium for clean electricity and gas and others buy Teslas and Powerwalls. Sustainable aviation fuel (SAF) costs eight times as much as regular jet fuel.

In his book "How to Avoid a Climate Disaster," Bill Gates suggests there should be a price on carbon to promote innovation.

"We can reduce Green Premiums by making carbon-free things cheaper (which involves technical innovation), by making carbon-emitting things more expensive (which involves policy innovation), or by doing some of both. The idea isn’t to punish people for their greenhouse gases; it’s to create an incentive for inventors to create competitive carbon-free alternatives. By progressively increasing the price of carbon to reflect its true cost, governments can nudge producers and consumers toward more efficient decisions and encourage innovation that reduces Green Premiums. You’re a lot more likely to try to invent a new kind of electrofuel if you know it won’t be undercut by artificially cheap gasoline."

But when you keep the price of fuel high, what do you get? Possibly more greenflation, and as Gates notes, we might have to keep the prices high to make the alternatives more attractive. But that creates its own problems. German economist Isabel Schnabel of the European Central Bank recently told a panel, quoted in Bloomberg:

"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 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."

This is a supply and demand problem, with too many people chasing too little lithium and copper. There is, of course, an alternative solution to more mining: reduce demand. Instead of making giant battery packs for electric pickups and giving them giant subsidies, how about lightweighting everything and using materials more efficiently? Or, for that matter, promoting alternatives to the pickup. We could demand greater efficiency in everything we make, but also promote sufficiency, figuring out how much we need in the first place.

Greenflation comes from too much money chasing too little stuff, and it is already being used to justify backsliding, with politicians in the United Kingdom, for example, calling for the end of green policies that raise costs and more drilling for gas and oil to reduce them. But a better way to deal with it is to make smart decisions that reduce demand.