National Review Online, January 12, 2022

The only surprise in this story (to me) is that someone at the European Central Bank, Isabel Schnabel, the member of the ECB’s Executive Board responsible for market operations, has been talking frankly about greenflation. Her motive for doing so may (I’m guessing) come in part from her well-publicized worries about the ECB’s, uh, aggressive use of its balance sheet, but her speech is focused elsewhere than on the quantitative-easing debate.

Schnabel highlights how much energy prices have risen in Europe (a development, it must be said, that’s hard to miss). To be fair, it’s a phenomenon that doesn’t owe a great deal to climate policies (except in the U.K. and, arguably, Germany).  However, Schnabel’s key point is that, sooner or later, such policies are going to have a more persistent impact on the cost of energy:

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.

Typically, central banks ignore energy prices (they go up, they go down) when setting monetary policy, but that, Schnabel maintains, may not be an approach that they can safely take when increases are driven by something more lasting than the ebbs and flows of the market. And that, Schnabel argues, (my emphasis added) could be on the way:

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.

“Risk” strikes me as understatement, as does “possibly.”

Moreover, as Schnabel relates, the ECB is starting to take these “risks” into account:

The energy transition therefore poses measurable upside risks to our baseline projection of inflation over the medium term.

At our Governing Council meeting in December, such risks were one factor in deciding on a step-by-step reduction in the pace of asset purchases over the coming quarters.

Schnabel accepts that “at present, renewable energy has not yet proven sufficiently scalable to meet rapidly rising demand,” a phrase that is both accurate and diplomatically put, a rare pairing. The reality for now is, thanks above all to the difficulties arising out of intermittency, that no one can be sure when renewables will be able to fill the gap created by neglecting or abandoning fossil fuels. Under the circumstances, discouraging investment in the production of at least the less carbon-intensive fossil fuels makes no sense, particularly when the result will be to hand cash and leverage to Russia and the Middle East, parts of the world not famous for their friendliness to the environment or to the West. And yet the ECB is part of a regulatory and financial-sector coterie set on doing just that. If investments, in the West anyway, in fossil fuels are “subdued,” Schnabel knows why. Indeed, she discusses that issue during her speech.

Writing for Bloomberg, Javier Blas suggests that Schnabel’s comments “signal a re-think among policymakers about the energy transition — already evident within the Biden administration, but now apparently spreading into Europe.” There are, it is correct, some signs of this on the continent, such as France’s renewed nuclear program, and the EU Commission’s proposed definition (under certain conditions) of both nuclear energy and natural gas as “green,” but I am not convinced that Schnabel’s speech does much to support that proposition. As Blas concedes, Schnabel isn’t recommending that governments slow down the fight against climate change. She is merely looking at some of the problems that might be caused by that fight, admittedly an unusual tack for an important figure in the ECB to take. Until now, Blas writes, “the ECB had focused mostly on the impact of climate change on financial stability . . . rather than on the consequences of the energy transition itself.”

That supposed risk to financial stability is, as John Cochrane has shown in Capital Matters and elsewhere (including in a talk to the ECB), nonsense. But it is a fantasy that gives the ECB an excuse to get involved in climate matters, and Schnabel is prepared to go along with it, citing scraps of market data without pausing to ask whether the fact that some in the markets believe in a fantasy makes it any more real. Nevertheless, it is to her credit that Schnabel seems willing to engage in a dialogue about the difficulties the Paris agreement will cause, even as she clings to its orthodoxies.

Blas also explains that greenflation will not be confined to energy costs:

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.

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.

That Schnabel “didn’t say much about businesses” says quite a bit about the EU’s mandarin class.

Even if spending on green infrastructure and technologies ought to provide pockets of growth, the overall picture — rising costs, increased central planning, and massive investment in less effective (at least for now) energy sources — is hard to reconcile with the idea that the process of green transition will generate the jobs and prosperity claimed by those peddling green new deals of various descriptions. Schnabel is more optimistic:

[The] transformation of our economies through large-scale public and private investment programmes and the subsequent adoption of more efficient and greener technologies is expected to boost, rather than weigh on, economic growth and thereby support wages and aggregate demand.

That doesn’t look like evidence of a rethink to me.

Then again, Schnabel doesn’t have to bother about elections. The same cannot be said of the Biden administration. Intriguingly, Blas reports that the White House has “fine-tuned its energy transition message over the last few months.” Inevitably, he cites the administration’s humiliating appeal to OPEC+ to increase production, but also refers to signals to U.S. oil and gas companies that more drilling was welcome. Additionally, Blas cites remarks made in October by Amos Hochstein, the State Department’s senior adviser for energy security:

“If we want to solve climate change we need to do so while at the same time insulating the global economy from extreme energy shocks.”

What “extreme” means is anyone’s guess, but I am far from persuaded that we have seen anything more significant from the White House than a panic attack over the political implications of surging prices at the gas station (thus the ludicrous suggestion that the FTC should be unleashed on oil companies to investigate possible “wrongdoing”). Meanwhile, the administration, its proxies in the regulatory agencies, and — corporatism being what it is — the financial markets, will continue with policies intended to push the transition forward, preferably without triggering sudden jumps in energy prices so pronounced that even the frogs in the pot — that’s us — will notice that something is amiss.

Greenflation will be around for a long, long time.