2022 Theme - What Is Greenflation & Why Does It Matter?

What is “Greenflation” and where does it come in?

The current energy market matters for three reasons:

First, after years of pretty cheap energy, the second half of last year seems like a portend of things to come, not a one off.

Even if $100-a-barrel oil doesn't materialize, $80-90 a barrel is an order of magnitude higher than the 5 year average before 2021.

After years of relatively cheap energy, we now be facing years of the opposite. That is a big change for the global economy.

Second, higher global energy prices are now starting to have a profound social, political and geopolitical impact around the world.

As we have argued before, high energy prices often have a political impact. We have often focused on the US in the past, which we stand behind, but other countries such as France also have important elections this year. There could easily be a "energy backlash" in any of them.

But expensive oil is also a far more broader and serious issue than a simple threat to democratically elected governments. Politicians in the West can lose their seats, but elsewhere the stakes are quite a bit higher than that.

You do not have to look very far to see evidence of this seriousness either. The recent protests (and violent suppression thereof) in Kazakhstan all began because of anger over surging fuel prices and then rapidly escalated into something far more serious and violent.

Those images will be reverberating around the world and politicians of all stripes will be watching with some combination of grave concern and extreme anxiety.

Lastly, as 2022 progresses it is very likely that the true costs of zero carbon emission targets will start to become apparent to a far greater number of people. How they react is a big, big question.

For years, far too many politicians have not just sung a virtuous tune around "being green" like Kermit-the-Frog but also acted in a short sighted and foolish manner.

We should stress that this isn't a Democratic vs Republican point. It isn't even an American issue. The revered (and Conservative) former Chancellor of Germany, Angela Merkel, was the one who rashly committed to closing down Germany's nuclear power plants after the Fukushima disaster.

Now the true cost for selling (or buying into) this narrative is coming due. This winter, as it shuts down its final two nuclear power plants, Germany is getting 35-40% of its electricity from coal. And not just any coal but lignite coal, the dirtiest and most carbon intensive variety.

Germany is also very dependent on Russian natural gas and only becoming more so as the transition deepens.

The German use case is hardly an isolated one, however. The foolishness and painful lessons go on and on:

The UK thought the wind would always blow and so their declining North Sea gas fields were a net positive.

Republican Texas invested in renewables and didn't think of freeze-proofing its natural gas pipelines.

California did likewise (and is presently shutting down its final nuclear plant) and neglected to upgrade its forests and transmission lines for a world with more forest fires.

Many communities (and green groups!) practice terrible NIMBYism (Not. In. My. Back. Yard.) that keep renewable projects (or more efficient fossil fuel projects) from being built.

This isn't about being anti-climate change. Rather it is about the foolishness of locking yourself into a narrative where you pretend that the energy you actually need TODAY isn't, for better or worse, from traditional (carbon intensive) sources.

In an earlier newsletter we introduced the concept of skimpflation and how this strategy is one of the ways companies (and governments!) hide inflation is by giving you less for the same amount. Thereby skimping out on what you used to sell for the same price.

Now we would like to introduce the concept of "greenflation."

2022 will likely be the year where many people come to appreciate just how expensive the energy transition will be, even under scenarios where we plan sensibly.

Most significantly, it is very unclear whether greenflation will be (can be!) transitory whatsoever. Under even the most optimistic scenarios it will likely take many years and, most especially, many trillions of dollars to manage the energy transition.

Put it all together and the world faces a growing paradox in the effort to combat climate change. The harder it pushes the transition to a greener economy, the more expensive the campaign becomes, and the less likely it is to achieve the aim of limiting the worst effects of global warming.

2022 might be the first year we truly start to grapple with these thorny realities of this near quantum shift in the global economy.


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