decarbonization to fuel inflation, but delaying efforts could hurt economic growth, returns


Government policies to mitigate the impact of climate change will fuel inflation, but delaying them could reduce economic growth and investment returns, investment strategists say.

Policymakers face a trade-off between the high initial cost of a rapid move towards net zero carbon goals and the long-term damage to economic growth from rising temperatures if they delay action, have to they declared.

“As global policy kicks in and brings to life the transition risks associated with reducing emissions, the concomitant rise in carbon prices from a very low base poses a significant upside risk to inflation in the country. over the next several years, “said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International in an August 16 report.

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The inflationary impact on China could drop from one percentage point this year to 4 percentage points in 2026, before dropping to almost zero in 2031 and turning negative after 2043, he predicted. While the impact on the United States and Europe – whose combined emissions are lower than those of China – would be about half or less than in China.

Such potential inflation due to the additional costs of doing business due to decarbonization efforts is underestimated and is not yet taken into account by investment markets, Ahmed said.

Carbon prices refer to the cost of purchasing emission allowances or taxes on emissions generated in the course of business activity. Investments in infrastructure and industrial processes to reduce emissions and improve energy efficiency also increase costs.

Christophe Donay, head of asset allocation and macroeconomic research at the Swiss-based Pictet group, expects less dramatic inflationary pressures.

With climate change mitigation measures, inflation could average 3.1% in China and 2.1% in the United States between 2025 and 2030, barely 0.1% more than without mitigation, Donay predicted in a report last month.

The average inflation rate for the decade up to 2020 was 2.52% in China and 1.73% in the United States.

Nonetheless, given the growing inflationary pressure, adopting an investment strategy that involves a range of real assets such as properties, commodities and gold can protect against inflation, he said. he declares.

With significant investments in green technologies, global warming mitigation measures could lead to an average annual economic growth of 4.8% in China between 2025 and 2030, higher than 4.7% if no action is taken. taken, said Donay.

Growth in the United States, a smaller maker of renewable energy equipment than China, could drop to 1.9% with such measures, however, and below 2.1% without them.

Incorporating climate considerations could also reduce annual returns of global stock markets by 0.3 percentage point to 5.9% over the next decade, Donay said, with emerging markets likely to lose more than markets. developed.

China’s emissions trading market needs fine-tuning as it evolves to help the country meet the decarbonization goal

However, if the world allows emissions to rise at their current rate, China’s economic growth could drop to just 1.4% in the decade to 2040, compared to 3% if we exclude the impact of climate change, predicted Ahmed of Fidelity.

The respective decline forecasts for the United States are 1.9% to 1.2%, while that of the emerging markets will collapse from 3.6% to 0.2%.

However, not all analysts are convinced of the impact of climate change mitigation on inflation.

The transition to a low-carbon world will be messy and the outcome uncertain, mainly due to poor coordination between governments on policy response, said Andrew Zurawski, associate director specializing in Asia investments at Willis Towers Watson.

Analysts have differing views on the impact of climate change on inflation. Photo: AFP alt = Analysts hold differing views on the impact of climate change on inflation. Photo: AFP

“We don’t know if inflation will be higher or lower, but we think it will be more volatile,” he said.

Ulrik Fugmann, co-head of the environmental strategies group at BNP Paribas Asset Management, takes a contrarian point of view.

Inflationary pressure from climate change will be short-term, while decarbonization technology and sustainable living will drive costs down in the long run, he argued.

“The biggest deflationary pressure is the energy transition, since renewables have no fuel cost,” he said. “I see more deflationary pressures than inflationary pressures.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice on China and Asia for over a century. For more SCMP stories, please explore the SCMP app or visit the SCMP Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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