'Greenflation' Threatens Tackling Climate Change?

Greenflation is a big paradox amidst the world's efforts to build a greener economy. The faster the transition to a green economy, the higher the costs required, and the smaller the chances of achieving climate change targets.

Accelerating the transition to low carbon emissions (net-zero emissions) is needed to keep global warming at a theoretically safe level. There is still not a large supply of green alternatives (metals, energy, etc.) making the price of the green transition much more expensive. Government policies and business measures aimed at decarbonization are also driving up higher costs for consumers. Of course, this condition is not ideal in the midst of economic recovery efforts and supply chain constraints due to the Covid-19 pandemic.

Factors in the Occurrence of Greenflation

The transition to a clean economy requires large investments so that green energy can be implemented on a mass scale. To build renewable energy supporting technology requires large consumption of fossil fuels in the transition period. However, producers are not responding to this demand due to political and regulatory resistance that threatens the future of fossil fuels. As a result, transition prices rose sharply.

The two most important metals in green power installations are copper and aluminum. However, these two metal mining activities also face environmental, social and governance issues. Nearly 40 percent of copper supplies come from Chile and Peru, where mining has faced resistance from local communities due to environmental damage. Nearly 60 percent of aluminum comes from China, which recently closed new smelters because of their large carbon footprint.

Renewable technology installations require more wiring than fossil fuel types. Solar or wind power plants use six times more copper than conventional power plants. Copper is indeed one of the sustainable metals because it can be 100% recycled. However, current copper mining activities tend to be environmentally unfriendly. Improving the quality of copper mining is also a trigger for greenflation.

Apart from copper, aluminum is also one of the most important metals for solar energy and other green energy projects, and will experience a very sharp increase in demand in the coming decades. From a sustainability aspect, aluminum is also one of the metals that can be 100% recycled. However, currently aluminum is one of the dirtiest metals in the production process. Improving the quality of aluminum mining is also a trigger for greenflation.

Addressing Greenflation

At a certain level, increasing prices for better quality construction is a natural thing. Rising commodity prices needed for renewable energy will increase the costs of establishing environmentally friendly power generation projects. But this will be offset by better access to funds and economies of scale. So, the rising costs and supply chain problems of green projects are expected to be only temporary issues.

However, all parties also need to pay attention to balance aspects in the transition to green energy. It is important to realize that closing the old economy too quickly can push the costs of developing a green economy beyond reach. In the end, green economic transition targets are difficult to achieve and developing countries are the most burdened.

“High metal prices, carbon taxes, and accelerated capital obsolescence on fossil fuel investments are costs that must be paid on the road to decarbonization. Considering the consequences of not doing so, the costs are not insignificant. ‘Greenflation’ is worth paying for decarbonization.” Otaviano Canuto (Brookings Institution).