The Climate-Change Fight Is Adding to the Global Inflation Scare

The inflation scare that’s become a major theme in markets is getting fresh momentum from the climate-change battle and the huge economic transformation underway.

As governments recognize the importance of climate action and push every corner of the economy to decarbonize, industries from glass to steel to autos are being left with little choice but to change how they make products and ultimately what they sell. The technical hurdles and investment involved mean it’s going to cost much more. Just two examples: Making glass without poisoning the planet costs 20% more, cleaner steel is up to 30% more expensive.

The potential price hit from the green revolution is adding to the arguments about the inflation outlook that are already brewing as economies reopen from pandemic lockdowns and some commodity prices surge to record levels. BlackRock Inc., the world’s largest asset manager, and the Bank of England put the issue in the spotlight this month, while others have also cited environmental demands as one reason why the current inflation pickup won’t be transitory.

Hitting net-zero targets requires investment of $5 trillion a year in energy systems by the end of the decade, more than double the average in the past five years, according to the International Energy Agency.

And there's another piece to the puzzle. As green-minded investors tell oil companies to scale back drilling, the resulting supply squeeze is seen pushing up oil prices before economies are anywhere near phasing out fossil fuels.

“If I had to put my money on a single factor that was going to push up costs in the years to come, I would say it was the environmental emphasis and in particular the drive towards net zero,” said Roger Bootle, founder of Capital Economics Ltd. and author of the 1996 book `The Death of Inflation.’ “I think this is going to lead to a whole series of costs and price increases across the economy.”

Massive spending on new plants, technologies and processes could all feed through to prices. Manufacturing low carbon glass adds about 20% to the cost, according to Nippon Sheet Glass Co., which supplied the glazed exterior of The Shard, London’s tallest building. That’s a squeeze companies have to either swallow or pass on to customers.