In the latest episode of global inflation, ‘climate change’ is one of the key players. It has significantly impacted the supply and demand equilibrium of many commodities and services in a variety of ways. For example—
(a) Notable changes in weather patterns have adversely impacted the crop production and livestock supply globally, resulting in sustained rise in food prices.
(b) The global commitment to fight climate change has resulted in a significant rise in investment in clean energy and clean technology; mostly at the expense of investment in conventional energy. Most countries are aiming to achieve ‘zero emission’ in the next 3 to 4 decades. In the transition period, obviously the supplies of conventional energy shall remain constrained for the lack of adequate investment, tilting the scale in favor of higher prices. Sharp surge in coal and crude oil prices (even adjusted for logistic challenges due to Covid) is indicative of this.
(c) The focus on clean energy and clean technology has resulted in an immediate rise in demand for non-ferrous metals, silicon, rare earths, semiconductors; whereas the additional capacities will come in due case as new investments are committed. Covid may have pushed the capacity building process further by 3 to 4 years. The demand pull inflation in these commodities and products may also sustain for some more time.
(d) ‘Climate change’ and the efforts to control/reverse the adverse effects of climate change are resulting in significant displacement of labor in many areas, resulting in demographic imbalances besides demand-supply mismatch.
The farmers displaced due to adverse weather conditions due to climate change are struggling to get employment.
The skill requirements for the jobs lost in the ‘carbonized ecosystem’ and jobs being created in the ‘clean ecosystem’ are very different.
As per a recent McKinsey report, to achieve ‘net-zero’ by 2050, the capital spending on physical assets for energy and land-use systems will need to rise by $3.5 trillion per year for the next 30 years to US$9.2trn/year. The cumulative capital spending on physical assets for the net-zero transition between 2021 and 2050 would be about $275 trillion. A net-zero transition would have a significant and often front-loaded effect on demand, capital allocation, costs, and jobs.
The report highlights - (i) The transition would be felt unevenly among sectors, geographies, and communities, resulting in greater challenges for some constituencies than others. Developing countries and fossil fuel-rich regions are more exposed to the net-zero transition compared with other geographies; and (ii) As high-emissions assets are ramped down and low-emissions ones ramped up in the transition, risks include rising energy prices, energy supply volatility, and asset impairment.
The points to ponder, inter alia, are (i) whether the global economy is prepared and willing to tolerate the pain of transition for 20-30 years; or efforts would be made to find a balance by allocating adequate capital to conventional energy and technologies; especially hydrocarbons and food production; and (ii) who will bear the losses as trillions of dollars in extant assets become redundant?
