The Costs of the Energy ‘Transition’ Won’t Be ‘Transitory’
National Review Online, June 11, 2022
Tucumcari, New Mexico, October 2021 © Andrew Stuttaford
The appointment of Christine Lagarde as president of the European Central Bank was never going to bode very well for the way that the ECB is run. Lagarde is a politician, not a banker, and, as to her attitudes to rules, well, many of those who followed the euro zone crisis (a time when Lagarde was France’s finance minister) will remember her comments after those in charge approved the first Greek bailout.
“We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying.
“The Treaty of Lisbon was very straight-forward. No bailout.”
Oh well.
Since taking on her job at the ECB she has been one of those responsible for involving the central bank into climate policy. Questioned about whether that particular piece of mission creep was appropriate at a time when the euro zone was in the grips of the pandemic, she was scathing:
Asked whether the pandemic could dilute the importance of green issues, the ECB president said that “those who would be tempted by that option would live to regret it”. She added: “I have children, I have grandchildren. I just don’t want to face those beautiful eyes, asking me and others: ‘What have you done?’”
The best that can be said about that argument is that it makes more sense than her claims that the ECB’s involvement in this area can be justified on the basis that climate change represents a systemic financial risk, a claim that has (repeatedly) been demolished by John Cochrane and others. But then we know what she thinks about rules.
Meanwhile, euro zone inflation has been running well above its medium-term target. Under the circumstances, any suggestion that climate policies could contribute to inflation (“greenflation”) is . . . unhelpful.
In January, I noted my surprise that Isabel Schnabel, a senior member of the ECB hierarchy (she is the member of the ECB’s Executive Board responsible for market operations) had been talking frankly about greenflation (even if she did not use the term). Although, she maintained, the run-up in energy prices in Europe didn’t owe a great deal to climate policies (with, I argued, notable exceptions such as the U.K. and, arguably, Germany), Schnabel warned that, sooner or later, they would have an impact (and not in a good way):
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. (emphasis added)
As I wrote, “risk” struck me as understatement, as did “possibly.”
Those words “insufficient production capacity” may conceal a deeper problem: Renewables (specifically wind and solar) are not ready for prime time. Thanks primarily to difficulties arising out of intermittency, no one can be sure when they will be able to fill the gap created by the withdrawal from fossil fuels. And the unwillingness to invest in the backup power sources that renewables are likely to need for the foreseeable future will only add unreliability (another cost).
That said, there was growing, if belated, recognition (now accelerated by the war in Ukraine) that that unwillingness would need to be scaled back. Nuclear power is coming back into vogue in some countries, and the EU Commission, at least, is rightly prepared to designate both it and natural gas as green fuels, if only, in the latter case, on a “bridging” basis.
But, even assuming the commission’s proposal is approved, new nuclear power stations will take years to build (after, probably years of controversy and litigation). Meanwhile, even now, as the fighting continues in Ukraine, the Biden administration appears to be divided between climate fundamentalists and those who recognize that we will, in some form or another, and for some timespan or another, need to stick with oil and gas, divisions hardly designed to encourage investment in new production. The same can be said of talk of “price gouging,” not to speak of proposed windfall taxes.
Then there is the way that, despite a partial retreat by BlackRock, the “cartel” formed by regulators, C-suite stakeholder capitalists and ESG-influenced investors seem set on continuing to obstruct investment in energy sources they deem sinful despite the fact that they are essential to ensure a (relatively) smooth transition away from GHG-emitting fuels. The alternative will be a chaotic leap into (quite literally) the dark, a leap that will both be hugely and unnecessarily expensive, while doing little for the climate.
In my piece, I also quoted from an article by Bloomberg’s Javier Blas.
Here’s an extract from an extract:
There’s more to come beyond energy commodities. As the world moves to electrify everything — from heating to driving — the commodities needed to power the green transition are in greater demand and, therefore, getting more expensive. Take lithium, a crucial element of electric car batteries: It has surged to a record. The same is true of copper, which is needed in every piece of electrical cable.
This is a reality that many of those proposing the “electrification of everything” continue to overlook, as is obvious from their efforts to force through the adoption of electric vehicles, a policy that may represent (so far) a pinnacle of obliviousness, even by the standards of climate policy-makers.
Meanwhile, via Reuters (June 9, emphasis added):
U.S. renewable energy developers have delayed or scrapped several big battery projects meant to store electrical power on the grid in recent months, scuttling plans to replace fossil fuels with wind and solar energy.
At least a dozen storage projects meant to support growing renewable energy supplies have been postponed, canceled or renegotiated as labor and transport bottlenecks, soaring minerals prices, and competition from the electric vehicle industry crimp supply.
Back to Blas:
Greenflation will have fiscal and monetary consequences, Schnabel argues. Governments will need to support the families left behind as energy prices soar. She didn’t say much about businesses, but it’s clear that if Europe lets rising gas and electricity prices go unchecked, the region would lose its energy-intensive industries — from aluminum smelters to fertilizer producers.
Britain’s food supply is now “vulnerable” after spiralling energy bills prompted the permanent closure of one of only two major fertiliser plants, farmers have warned. . . .
CF Fertilisers will shut down its Ince manufacturing plant near Chester, which provides crucial supplies of nitrogen fertiliser and carbon dioxide. The company said it could no longer afford to keep the plant open amid spiralling gas prices and high environmental taxes. Production has been suspended since September.
Well, it’s not as if there is a food crisis or anything.
Note too, the contribution made by “high environmental taxes.”
On the topic of those taxes, pause to marvel at the fact that Boris Johnson, whose climate fundamentalism has reached a point that suggests a need for either psychiatric help or a less destructive religious outlet, is now greener than Germany, the Heimat of environmentalism. Johnson, the Daily Telegraph (June 8) reported, has so far ignored calls to suspend green taxes, including from “scores” of Tory MPs who presumably can see what, electorally lies ahead.
The Daily Telegraph:
Last autumn Germany slashed its own environmental levy, called the renewable electricity surcharge, by more than 40 per cent as gas prices soared.
The other ideas – cutting VAT on energy bills and implementing a more permanent reduction in fuel duty – have been called for by scores of Conservative MPs.
Downing Street and the Treasury is resisting demands to adopt any of the three measures and is holding off tax change considerations until the November Budget.
Maybe Johnson’s humiliatingly narrow win in a recent vote of confidence called by Conservative MPs will mean that he sees reason at that time.
Meanwhile, Lagarde tweets (June 1):
We are now observing “fossilflation”, not “greenflation”! While decarbonisation in the energy sector can cause rising prices in the medium term, it can lower inflation in the long term. That’s why green innovation is key.
When Schnabel spoke in January, she never referred to “greenflation.” Adding a catchy name to unspeakable truths would not have been appropriate. By the time she gave a speech in mid-March, the ECB’s climate policymakers had (I suspect) been busy devising neologisms designed to distance inflation (bad) from green (good). And so Schnabel argued that three distinct inflations were associated, one way or another, with climate change. The first is inflation linked, she maintained, to the cost of climate change itself:
As the number of natural disasters and severe weather events is rising, so is their impact on economic activity and prices. For example, exceptional droughts in large parts of the world have contributed to the recent sharp rise in food prices that is imposing a heavy burden on people who are struggling to make ends meet.
The second is “fossilflation,” which was, she argued, responsible for much of the recent rise in inflation: “Fossilflation reflects the legacy cost of the dependency on fossil energy sources, which has not been reduced forcefully enough over the past decades.”
Quite how that dependency could have been reduced by enough to be effective given widespread aversion to nuclear power, the rapid growth in China and other emerging markets, and, to return to an earlier theme, the fact that renewables were simply not ready was left unclear. To her credit, Schnabel did accept (as she had done in January) that the growing hostility in the West to investment in new production would affect fossilflation in the next few years:
[M]any institutional investors in financial markets have started to materially reduce their exposures to fossil fuel energy producers, leading to increased funding costs and contributing to the sluggish response of crude oil production in large parts of the world.
Finally, Schnabel turned to greenflation as she (now?) understood the term (my emphasis added):
Many companies are adapting their production processes in an effort to reduce carbon emissions. But most green technologies require significant amounts of metals and minerals, such as copper, lithium and cobalt, especially during the transition period.
Electric vehicles, for example, use over six times more minerals than their conventional counterparts. An offshore wind plant requires over seven times the amount of copper compared with a gas-fired plant.
No matter which path to decarbonisation we will ultimately follow, green technologies are set to account for the lion’s share of the growth in demand for most metals and minerals in the foreseeable future.
Yet, as demand rises, supply is constrained in the short and medium term. It typically takes five to ten years to develop new mines.
This imbalance between rising demand and constrained supply is why the prices of many critical commodities have increased measurably in recent months. The price of lithium, for example, has increased by more than 1000% since January 2020 [as a reminder, this speech was given in March]. Export restrictions on Russian commodities may add to pressure on prices over the near term.
These developments illustrate an important paradox in the fight against climate change: the faster and more urgent the shift to a greener economy becomes, the more expensive it may get in the short run.
[A]s more and more industries switch to low-emission technologies, greenflation can be expected to exert upward pressure on prices of a broad range of products during the transition period.
Conclusion? Readers can debate climateflation among themselves, but the idea that there is necessarily a clean distinction between fossilflation and greenflation is not one that will stand up over time. If, because of agitation against fossil fuels — whether from that “cartel” or from governments — companies cut back production, fossil-fuel prices will be higher than they would otherwise have been. It is hard to see that as anything other than another transition cost, or, in other words, as a part of greenflation.
Given that the pace of the transition is currently planned to pick up rapidly, greenflation will be contributing to rising prices for quite some time. There will be nothing transitory about the transition costs, which ought to be calculated in a way that also measures the way they will hold back economic growth.
Greenstagflation? It’s more than possible.
The better course? Boost spending on adaptation and improving resilience, (such as strengthening the sea defenses of low-lying cities), which will often pay for itself. As far as alternative sources of energy are concerned, focus on nuclear. For renewables, emphasize research (particularly on energy storage), rather than spending billions on equipment not yet ready for prime time. Otherwise, don’t let the perfect be the enemy of the good: Continue to switch into less GHG-intensive natural gas, while developing better systems to limit methane leakage. And reject climate masochism, whether banning gas appliances in new homes or the sale of new internal combustion cars.
Above all, work with the free market, not central planning. Whether the central planners now in charge of climate policy will be prepared to accept that, well . . .
From National Review’s Capital Letter, June 11, 2022