While the world agrees on the necessity of transitioning to renewable energy to combat climate change, a new term is appearing in economic dictionaries: "green inflation." This term refers to the price increases resulting from the cost of the environmental transition—the gap between the current price of renewable energy and the price needed to replace fossil fuels. Economic analysis of this phenomenon reveals that the clean energy transition will not be immediate but will come with a transition period characterized by price volatility.
The primary cause of green inflation is the increased demand for critical metals required for green technologies, such as lithium, cobalt, and copper. As the production of electric vehicles and wind turbines has increased, the prices of these metals have doubled, driving up the cost of finished products. Furthermore, investment in electricity grid infrastructure requires hundreds of billions, and this investment will be partially financed by higher electricity prices for consumers.
In Europe, this situation has led to a double whammy. After reducing dependence on Russian gas, the solution was to invest in renewable energy, but this rapid expansion has come at a high cost. Governments are forced to impose new energy tariffs and taxes to subsidize green investments, increasing energy bills for homes and factories. This creates a sense of public discontent with green policies, especially during economic downturns.
However, economists argue that this green inflation is temporary. Once power plants are built, the cost of producing electricity from solar and wind power becomes significantly lower than from fossil fuels. The problem lies in the upfront cost and dependence on weather. Grid integration and the development of storage technologies will reduce these fluctuations in the long term. But in the short term, price pressures may persist.
Developing countries are the most affected. They cannot afford the green transition without financial assistance from wealthy nations. If they attempt to finance green investments by increasing debt, they may face debt crises. This creates a moral conflict between the historical responsibility of wealthy nations for pollution and the need for development in the Global South.
In conclusion, green inflation is a price that must be paid to save the planet. However, it must be managed wisely to avoid exacerbating social inequality. The solution lies in investing in energy efficiency (less energy use) and supporting the poorest families to bear the costs of the transition, to ensure that the environmental solution does not become an unbearable economic burden.
