Persistently high energy prices risk leading to unsustainable inflation that may push the European Central Bank (ECB) to raise its initial forecasts, ECB board member Isabel Schnabel said on Saturday, stressing that the bloc’s climate policies likely mean high energy values will linger or even increase further.
Inflation in the Eurozone rose to a yearly rate of 5% in December, according to EU data last week, well above the bank’s annual target of 2% yet so far not prompting the institution to tighten monetary policy.
In a speech to the American Economic Association, Schnabel noted that the ongoing surge in energy prices seems to have little to do with what might have happened in the past due to an unprecedented clean energy transition.
“While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated but even have to keep rising if we are to meet the goals of the Paris climate agreement,” she said.
Her comments reflect the increasing attention the bloc’s monetary policymakers are putting on EU carbon prices, with the bank’s monthly forecasting materials giving more focus as EUA values rose some 140% over 2021 while gas prices jumped eightfold amid resurgent post-pandemic demand and limited supplies from Russia.
Core to the clean energy transition will be a fast rise in carbon prices, Schnabel said, identifying the European Commission’s Fit for 55 climate package and the transformation of financial markets as two main developments that could put upward pressure on pricing.
This is likely to bring to a protracted period of inflation, with companies and households potentially more exposed to rising costs than they can initially cope with, as low carbon investments – that a high carbon price is meant to incentivise – may take time to materialise.
“The combination of insufficient production capacity of renewable energies in the short-run, subdued investments in fossil fuels and rising carbon prices means that we risk facing a possibly protracted transition period during which the energy bill will be rising,” Schnabel said.
Because these developments are set to represent a challenge for policymakers, Schnabel noted that a looming risk of energy poverty should be promptly addressed by implementing adequate correcting policies, hence preventing the bloc’s green agenda from slowing as a result.
“It would be a serious mistake if governments, faced with rising energy prices, would backtrack from their commitment to reduce emissions. Governments should also not slow down the pace of the transition or delay the phasing out of fossil fuel subsidies,” she said.
Some of these measures have already been pushed forward by the European Commission, the ECB’s official pointed out, including the proposed introduction of a Social Climate Fund aimed at redistributing roughly 25% of the revenues stemming from a proposed extension of the carbon market to the transport and heating sectors from 2026.
However, countries like Denmark and Sweden have voiced their reluctance towards the fund, questioning the overall utility of a new cash pot – which they argue comes on top of several other funds tasked with supporting the energy transition.
At the most recent meeting of environment ministers in December, Denmark’s Per Fabricius Andersen said the bloc already had the tools to deliver a just transition.
“We have already €615 billion of EU funding available for the green transition in the Multiannual Financial Framework (MFF) [the bloc’s central budget for 2021-2027] and the recovery instrument, as well as in the Just Transition Fund for this exact purpose,” he said.
Finally, Schnabel hinted at the need for swift action by monetary and fiscal policymakers.
“Monetary policy… cannot afford to look through energy price increases if they pose a risk to medium-term price stability.”
Separately, quickly rising prices for raw materials needed to build a fossil-free energy infrastructure could become a severe problem for Germany’s energy transition, consultants of the German Economic Institute (IW) found in an analysis for the Bavarian industry association vbw.
Resources needed for car batteries, wind turbines, solar panels and other energy transition products are becoming increasingly costly on international markets and a dominant position by just a handful of suppliers leaves customers vulnerable to trade barriers, the consultants found, according to Clean Energy Wire.
Companies could therefore struggle to guarantee a steady supply of critical materials like copper, cobalt, lithium, or platinum, which means that the German government – as well as the EU – needs to stand in for their businesses and help secure access to raw materials, the industry association concluded.
Ruchir Sharma, head strategist at US investment bank Morgan Stanley, told media outlet Redaktionsnetzwerk Deutschland (RND) that rising demand for these materials amid a global push to decarbonise energy systems could lead to “greenflation”.
This would set in motion a spiral of higher prices, with potentially grave effects on climate action plans around the world in the coming years, while stricter supply chain and extraction standards could further exacerbate the problem, Sharma added.
Prices for lithium, a key element for car batteries, for example, rose 240% last year.
By Federica Di Sario – email@example.com