Does climate protection drive inflation?: “Green energy stabilizes the price of electricity”

Does climate protection drive inflation?
“Green energy stabilizes the price of electricity”

While an explosion in the price of fossil fuels is currently causing inflation to skyrocket, more and more warnings are being raised about long-term “green inflation”: rising prices due to the costs of the energy transition. In an interview with, Greenpeace economist Mauricio Vargas explains why he thinks this term is misleading. Some economists use the term “greenflation” to describe the fact that the transformation to renewable energies entails enormous costs that will increase prices in the medium term, including for consumers. Why does that bother you?

Mauricio Vargas: “Greenflation” or “green” inflation suggests that it is the necessary efforts to combat climate change or even green technologies that are driving inflation. In my view, this is misleading. After all, it is precisely the fossil fuels such as oil and gas that are traditionally largely responsible for the development of inflation with their strong price fluctuations, right through to serious crises such as the oil price shock. However, this has never been problematized as “fossil inflation”. I’m surprised why people are now talking about “green” inflation, especially since this term is factually incorrect. After all, electricity from renewable energy sources such as sun and wind is now significantly cheaper than from fossil fuels. Renewables can dampen inflation and, above all, stabilize it, since they are not subject to fluctuating commodity prices for fuels. What actually leads to higher costs for consumers and will also increase prices further on the way to climate neutrality is the CO₂ price. But here, too, I find the term “greenflation” misleading. Because the CO₂ price ensures that the real costs that fossil fuels cause, for example due to climate change, are reflected in the price. So it ensures transparency. These enormous external costs have so far been socialized and therefore borne by society.

The production costs of electricity from already installed wind and solar power plants may be lower than that of coal or nuclear power. But that doesn’t include the high investment costs for converting the entire energy sector.

That’s correct. In order to be able to use this cheap idea, we have to invest in the infrastructure. The power grid must be converted from the current central power generation in a few large power plants to many small, decentralized wind power and solar systems. To do this, we need to build up storage capacities. Nevertheless, this does not change the overall picture in the long term. The costs for renewable energy production are constantly falling, while fossil fuels are tending to become more expensive, not least because of the rising CO₂ price. In addition, many of the costs are not even included in the prices for conventional electricity, such as the insurance and final storage costs for nuclear power plants.

However, the low production costs do not benefit consumers and industry when electricity is scarce, because expansion is not progressing or because generation fluctuates with the weather and the seasons.

I am not claiming that there are no longer any risks or price fluctuations with renewables. But just because they don’t need fuel, they have an advantage over fossils. It is already the case that the currently around 40 percent electricity from renewable sources has a stabilizing effect on the price for end customers, the fluctuations of which are largely caused by the 60 percent share of conventional electricity. I am convinced that we can compensate for fluctuations in power generation with storage and smart grid management. E-cars and heat pumps have enormous potential and could be used as decentralized storage, for example. The costs for battery storage are currently collapsing – despite the repeatedly invoked price increases for raw materials such as lithium. So far, despite the increasing demand for expensive raw materials such as copper and rare earths, for example for smartphones, digitization has caused consumer prices to fall and dampened inflation. It wouldn’t surprise me if in a few years we see a similar effect from the energy transition and talk about green deflation instead of greenflation.

So far we are only talking about electricity. The situation is different with hydrogen, which is central to the transformation to a climate-neutral industry. It is likely to remain scarce and extremely expensive for a long time, which will increase costs and thus consumer prices.

In fact, we are much later with hydrogen than with wind and solar energy, the expansion of which began decades ago. Whether we manage to provide sufficient hydrogen capacities in time, for example to make steel production or aviation climate-neutral, now depends on the learning curve of the technology: How quickly the technology is developed further and thus cheaper. If this happens at the same pace as in the past with solar energy, that would be enough. If this learning curve develops more slowly, like in the case of wind energy, things become difficult. It is indeed not certain that technological progress alone will save us, but we should not underestimate the innovative capacity of our companies

Without cheap hydrogen in sufficient quantities, the industry would face a cost explosion, which will also be reflected in consumer prices.

Not necessarily. On the one hand, there are often alternatives for the industries concerned. If the production of new steel or aluminum becomes more expensive, companies could increasingly switch to recycling scrap metal, which uses less energy than producing new. On the other hand, this only increases the relative prices of some goods and services for the consumer. This does not necessarily mean a loss of purchasing power. An example: Perhaps flying will become many times more expensive in the coming decades, and a flight within Europe will cost many hundreds of euros. But if at the same time you could travel by train almost for free because it runs on cheap green energy and the infrastructure has been greatly expanded, then consumers will not have any disadvantages.

Max Borowski spoke to Mauricio Vargas

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