“Green inflation” is the term used to describe price increases that result from climate protection measures.
What is “green inflation”? Meaning, definition, explanation
Experts warn of “green inflation”. On the one hand, this is related to climate protection and their investments. The energy transition and rising CO2 taxes are driving the price increase. As early as February 2021, a British economist predicted that we would soon be facing very high inflation. This is due not only to the cost of climate change, but also to an aging population and declining globalization. The high CO2 prices could then bring about so-called “green inflation,” the economist warned.
In earlier centuries, rising bread prices could be taken as a yardstick. Today, it is energy prices, whose price increases are currently going through the roof. The Federal Statistical Office stated that at the end of 2021, energy was 22.1% more expensive than 12 months earlier. Fuels and heating oil even rose by 50%. In the case of electricity and gas, the prices were still halfway bearable, as they rose by “only” 12%. Provided that consumers had a contract with a price guarantee.
There are many reasons for the price increase. Geopolitical tensions, the recovery of the global economy, rising prices of emission rights, or even the abolition of the temporary VAT reduction. Not to forget the new CO2 tax.
Of course, some of these factors are probably only a temporary phenomenon. However, if politicians are serious about climate protection, we may see further increases in fossil fuel prices in this regard. Only higher prices will lead to a change in behavior and a rethink among consumers.
The problem here is that many people are unable to react so quickly to price changes. In rural areas in particular, many working people are dependent on cars to get to work. People who live in their apartment for rent cannot simply insulate it on their own or even install a new, economical heating system.
Additional inflation driver Energy turnaround
The ban on cheap, conventional energy sources is forcing the economy to switch to expensive energy sources. Production costs also increase as a result of the abolition of coal and nuclear energy. The associated inflation could no longer compare to the oil crisis in the 1970s.
Climate protection programs of the EU Commission and the switch to renewable energies will probably boost consumer prices even further. In addition, there is also the pricing of greenhouse gases. To this end, the German government has agreed the following as part of the national emissions trading system: The CO2 tax is to be raised from 25 to 30 euros per metric ton until it gradually reaches 55 euros per metric ton in 2025.
Rising prices for CO2 certificates
At the European level, pollution rights are also costing more and more. Within a year, CO2 certificates traded on the Leipzig Power Exchange have tripled in price. They rose to 82 euros. Sometimes the limit of 90 euros has been exceeded. Electricity producers have even switched to coal-fired power because of rising gas prices. This, of course, encouraged the emission of CO2 gases, which in turn led to strong demand for CO2 allowances. Industrial plants and power stations need these allowances. They have to deliver one certificate to the emissions trading office for each ton of CO2 emitted.
It is only a matter of time before CO2 certificates break the 100 euro per ton barrier. A U.S. investment bank has already predicted such an effect in terms of price increases. In such a scenario, an increase would have a significant impact on consumers’ electricity costs, which could well rise by 12%. This would add 35 basis points to the rise in overall inflation in the euro area.
CO2 policy contributes to inflation
Rising CO2 taxes are also impacting consumer prices in Germany. In 2020, Germany’s CO2 policy has already contributed up to 1.1 percentage points to the increase in the CO2 levy.
The consequences of the high CO2 price are already being clearly felt in consumers’ wallets. Electricity prices, which have risen more than 18% in 2020; gas prices were subject to an even greater increase. The trigger for this price explosion was the initially rapid recovery of the economy after the corona-induced lockdown. The imbalance of supply and demand in the gas and oil markets also contributed significantly.
As is well known, many electric and gas utilities raised their prices. This is likely to be reflected in many consumers’ bills over the next few months.
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After oil prices initially fell again slightly in December 2020, consumers felt a slight increase again as early as January 2021 due to the discontinuation of the temporary reduction in VAT.
The direction of CO2 prices, however, knows only one path: upward. The politically enforced taxation of greenhouse gases will further spur “green inflation”. The inflationary effect is already pre-programmed by the steady increase in the CO2 surcharge until 2025.
Is “green inflation” dangerous?
So will “green inflation” become a real danger this year or in the following years? Many banks are concerned about this situation. The economy’s abandonment of the use of CO2-emitting technologies could lead to distortions and thus have an impact on inflation.
However, many economists consider the discussion about “green inflation” to be completely misguided. Opinions claiming that “green inflation” is bad or even harmful would be wrong and cynical. Economists agree that it is not the CO2 price and climate protection that would lead to increased inflation. The opposite would be true. Climate change itself and related trade disputes would pose the greater threat.
Prices for climate-damaging actions and behaviors will rise
It is probably fair to agree that some degree of “green inflation” is probably right and also necessary. It reflects an adjustment in relative prices. In order to incentivize innovation and climate-neutral economic processes, prices for climate-damaging behavior must rise. Consumers probably need to be aware of this.
If the calculations are correct, the inflation rate in the next few years would no longer average 1.4%, but 1.9%. This is based on the assumption that inflation will be 0.5% higher. After all, this figure would still be below the inflation rate of 2% calculated by the ECB.