Fighting inflation with climate action

Democrats this weekend passed what would be the largest spending ever by the United States to curb global warming, but you wouldn’t necessarily know from the name of the measure that it had anything to do with the climate.

The $370 The billion-dollar bill, designed to move the country away from fossil fuels and toward solar, wind and other renewable energy, is called the Inflation Reduction Act and is expected to pass the House this week. (In case you don’t remember, Senator Joe Manchin III cited inflation as one of the main reasons for not supporting an earlier version of the bill.)

In fact, the name is appropriate because there is a direct connection between climate change and rising prices, no matter where you are in the world. Today I’ll explain that link and talk about how those billions in spending could help reduce, not increase, inflationary pressures in the future.

The ‘fossilflation’ problem

Fossil fuels are subject to abrupt changes in supply, and those changes can cause shocks to energy markets that fuel inflation around the world. We are seeing it now with the Russian invasion of Ukraine, and we have seen it before. In the late 1970s, for example, sharp reductions in Middle Eastern oil exports caused energy prices to rise in the United States. At one point, inflation rose to 9 percent.

In the summer of 1979, President Jimmy Carter had solar panels installed on the roof of the West Wing of the White House. The gesture was symbolic. Carter and his advisers knew that investing in renewable energy was a way to protect consumers from inflation.

This is because wind and sunlight, unlike oil and gas, are free (although the power plants that use them are expensive to build). And, even if there are cloudy and windless days, supplies are not subject to geopolitics.

“For fossil fuel, most of the spending is on feedstock. It’s the operating expenses, the fuel,” said Gernot Wagner, a climate economist at Columbia Business School. “With renewable energies, it is exactly the opposite, in the sense that initially it is the solar panel that costs a lot. And once installed, you’re essentially printing money.”

What happened to those White House solar panels? Carter lost the 1979 presidential election in a landslide, and his successor, President Ronald Reagan, withdrew them in 1986. A panel is now preserved at the National Museum of American History.

The risks of delay

The transition to cleaner energy takes time. The less time you have, the greater the risks of economic disruption.

For example, if countries slash fossil fuels before cleaner energy sources like wind and solar are fully developed, the imbalance will likely drive prices higher. Similarly, consumers may want to buy new products, such as electric cars, that are not yet available in large numbers. Once again, the imbalance is very likely to lead to higher prices.

“Those are the risks stemming from measures governments take to transition to a greener economy, such as a carbon tax, green technological innovations, or changes in consumer preferences for greener products,” said Irene Heemskerk, director of the climate change center of the European Central Bank.

But slowly walking the energy transition is not the answer. Heemskerk told me that these risks mean that countries must act early and decisively for an orderly transformation that does not lead to sharp price increases.

If countries are forced to restructure energy markets in a desperate fight forced by more devastating fires, floods and heat waves, the ensuing economic turmoil is likely to mean high inflation and other economic problems.

In other words, the sooner the better.

The rising cost of extreme weather

Flooding can disrupt crops and significantly increase food prices. Hurricanes can damage power plants and cause power shortages. And extreme heat can make workers less productive.

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Economists still don’t fully understand all the ways these disruptions can cause inflation to spread through our globalized economy. Heemskerk said central bank officials around the world were still studying the economic consequences of various forms of extreme weather brought on by climate change.

But they know that the effects can be surprising.

For example, do you think a drought in Taiwan could affect the auto industry in the United States? That is exactly what happened last year. Computer chip manufacturers need water for the manufacturing process. Taiwan is a major supplier of chips, so a drought there has contributed to a shortage that has hit the auto industry hard.

By now, the economists I’ve talked to agree that the effects of climate change on inflation are often regional. But the more our planet warms, the more risks the global economy faces.

The latest consumer price data, by the way, is due out on Wednesday. The new numbers will tell us whether the highest inflation in the United States in more than four decades has begun to recede.

When you read about the report, keep the climate connection in mind.


Why this bill is different: The Democrats’ plan avoided the political pitfalls of previous legislative attempts to tackle global warming by focusing on incentives, not taxes.

How the measure was reduced: President Biden’s original tax, health and climate package was far more ambitious than the one the Senate passed. This is what changed.

‘no drama’ subscription: New York City has a new plan to get more people to recycle organic waste.

‘Chaos’ for a native community: A tribal leader in California watched as debris from a fire and flooding filled a river near his home, killing fish that play an important role in local culture.

Urban trees can be overlooked, particularly in Paris, where famous landmarks command attention. But public and political awareness of the city’s trees has recently been renewed, not only as monuments in their own right, but also as important assets in the fight against climate change.

Thank you for reading. We will be back on Friday.

Claire O’Neill and Douglas Alteen contributed to Climate Forward.

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