Green inflation?

©Olivier Le Moal,

According to projected figures from Destatis, the inflation rate for December 2021 is expected to be 5.3%. Consumer prices have risen by an average of 3.1 percent in 2021 compared to the previous year, with a higher rate last seen in 1993 at 4.5 percent. More and more suppliers are increasing their electricity and gas prices and switching to another provider seems to make little sense.

In October 2021, the annualized energy costs for a typical household were €4,549. A year ago, the same household only had to pay €3,371. But supermarket and service prices have also risen significantly. Headlines in the press read: “How expensive will climate protection be for citizens?” The CO2 price is intended to promote climate protection. But it could quickly become a financial threat to consumers. That’s scary. The price of CO2 certificates traded on the Leipzig electricity exchange has almost tripled within a year.

The ban on cheap traditional energy sources is forcing the economy to switch to more expensive energy sources.

Hans-Werner Sinn, former head of the ifo Institute, sees the energy transition as an additional driver of inflation.

That sounds plausible. But like everything else, it’s a question of perspective. Is climate protection responsible for rising prices or is it climate change? Marcel Fratzscher, Director of the German Institute for Economic Research (DIW), points out this key question.

We are all in favor of climate protection to stop global warming, but nothing should change in our lifestyles and it should cost as little as possible. It is true that inflation primarily affects those people who earn little. Politicians must take countermeasures here. But it is also true that we need higher CO2 prices as a means of steering towards more competitive renewable energies. Especially as renewable energies will reduce energy prices in the long term.

According to the DIW, other causes also play a role in the inflation debate, such as the coronavirus pandemic, supply chain problems, global trade conflicts and VAT adjustments. Climate change in particular is a threat to price stability.

Hot and cold spells, storms and floods are on the rise, making harvests that were thought to be safe less and less self-evident. Lower yields lead to price increases. Many people are particularly interested in how the summer weather turns out for leisure and vacations. But not whether, for example, the grain harvest is poor due to fungal infestation and our bread becomes more expensive as a result.

It’s a question of perspective, which is why the headlines should better read “Climate change drives inflation”.

Doris Höflich, Market Intelligence Senior Expert