These two words—climate change and inflation—are commonly read or heard in our environment. These now appear on every news article page, in every televised debate, in every corporate negotiation, in every board meeting, and in every conversation between two grocery store shopping women. The people’s dictionary has also been expanded with new words including climateflation, fossilflation, and greenflation. The temperature is rising along with the prices of commodities.
According to economists, the global inflation problem is a result of the supply-side phenomenon, which is simpler to manage because businesses can respond to increased demand by raising their supply. Cost-push inflation, or supply-side inflation, is another name for it. On the other hand, demand-side inflation (also known as demand-pull inflation), arises when consumer demand increases more quickly than the rate at which the supply of commodities increases. It takes place when the cost of getting goods and services to market rises.
WORLD INFLATION RATE (Source: The World Bank)
But can supply-side inflation be reduced with ease? Even if it could be simple, the root cause must be addressed rather than taking actions based on symptoms. If we claim that climate change is the primary factor causing inflation, we won’t be mistaken.
Inflation is discreetly fuelled by climate change. Let’s move forward incrementally. Higher energy costs and growing prices for unprocessed food are to blame for the inflation we are currently seeing. At present, people claim that the two are a consequence of the Ukraine conflict and the economic sanctions that the West and other democracies have levied on Russia. The claim is in fact, true on many grounds. Because of the conflict in Ukraine, many nations will have to rely less on Russian oil and gas imports. Then how will countries, especially European, survive without oil and produce energy. This will speed Europe’s transition to a greener economy. Let us question again- Will that impact inflation?
“The more urgent and faster the green transition becomes, the more expensive it will turn out to be.”
It is no surprise that the government is hesitant to implement policies like taxing carbon emissions or enacting financial rules to manage climate risks because doing so will result in increased costs for companies that produce energy, which will then be passed on to consumers.
In the coming decade or so, as nations around the world work to meet their commitments to reduce carbon emissions, the development of new green technologies and products that would aid in doing so will rely on materials, such as minerals and metals (such as copper, lithium and cobalt) whose supply is unlikely to grow in line with the increase in demand for them. The result will be “greenflation.”
It is important to note that there are numerous ways in which climate change might affect energy demand. The energy demand is first increased by events like a March heatwave or a winter that was colder than usual. Both the occurrence of extreme weather events and temperatures are rising. An intense change in temperature reduces productivity in humans which impacts the efficiency of the businesses. To ensure that firms and industries are operating efficiently and delivering same or rather increased output, management have to pay extra to the employees. This cost again gets debited from the customer’s account.
Second, before renewables reach their full potential, there will likely be a transition period during which power derived from fossil fuels is disincentivized. Energy prices may fluctuate significantly during this time.
Weather-related surprises are becoming more frequent, making it more difficult than ever to forecast India’s inflation patterns. Therefore, it is not surprising that inflation forecasting errors are increasing.
A heatwave in March 2022 wreaked havoc on the wheat harvest and compelled the government to impose a moratorium on wheat exports at a time when demand was rising globally. With periods of out-of-season rainfall and shifting monsoon patterns taking hold, we discover that rains have grown more unpredictable and deviate further from the average than they did before.
“India faces risks from the agriculture sector’s vulnerability to climate change, which could affect food inflation, as extreme weather events lead to volatility in food prices, especially of fruits and vegetables” – CRISIL
Sowing procedures may alter as a result of shifting rainfall and reservoir patterns. This, even momentarily, puts food crops under inflationary pressure. The occurrences have the potential to decrease the portion of farms that is suitable for growing crops, thwart productivity for extended periods, and raise operating costs for the land, including the price of financing, necessary infrastructure upgrades, and higher insurance and insurance premiums.
Global food prices reportedly reached their highest point ever in March 2022, according to the UN Food and Agriculture Organization (FAO). Although they were 0.8% below their peak in April, the price of the reference basket of widely traded food items was 29.8% higher than it was a year ago.
Power plant damage from hurricanes might result in a lack of energy. Homebuilding prices can increase and be destroyed by wildfires. The precise effect that harsh weather has on inflation is still being studied in depth. Agriculture prices, for example, are one change that is simpler to measure than other changes, such changes in labour productivity.
Food and energy inflation, key factors in the current uptick in total inflation, could become permanent as a result of climate change. Doing a Y-o-Y analysis, GDP growth dropped to 6.3% in quarter two of the fiscal year 2023 from 8.4% in the second quarter of the year 2022.
Increased global commodity prices and the rupee’s decline to a historic low had an effect on company profitability. Retail inflation fell to a three-month low of 6.7% in October after a prolonged period of hovering over 7%, although it was still above the RBI’s upper tolerance band of 6%. After 19 months, overall inflation began to decline to single digit.
Chief Economic Advisor V Anantha Nageswaran said- “Domestic inflation is expected to ease further back on the back of softening global commodity prices and expectation of good rabi crop.” That trend is unlikely to continue given the gloomy long-term picture for climate change.
According to an SBI Ecowrap analysis, despite a 28% increase in revenues, the operational earnings of 3000 listed businesses fell by 14% in Q2 FY 2023 y-o-y.
India may inevitably require an integrated institutional structure connecting the various aspects of policymaking to manage the rising volatility brought on by climate change and the shift to cleaner energy sources.
Senior Editor, TJEF