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The greenflation challenge

6 months ago
The energy challenge: although the world is committed to reducing dependence on fossil fuels, we haven’t invested enough in zero-carbon substitutes. Worryingly, the pace of progress isn’t moving quickly enough to meet the world’s rising energy demand.

Meanwhile, in the bid to build a cleaner global economy, increased spending on commodity-hungry renewable energy technologies is inflating the price of scarce ‘green’ commodities. This ‘greenflation’ is in turn pushing up the cost of the energy transition, at a time when Russia’s invasion of Ukraine has triggered an energy and commodity price shock. And tighter regulations intended to protect the environment are also restricting investment in new mining and extraction projects, limiting commodity supply and driving prices even higher.

The demand for ‘green’ commodities

The global demand for critical and rare minerals is projected to be six times higher by 2040, if the world is to achieve net zero emissions in 2050. What are these ‘green’ commodities that are so in demand?  Electric vehicle (EV) growth is set to soar over the next decade and a typical electric car requires six times the mineral inputs of a conventional car. Lithium, cobalt, nickel, graphite and manganese are the key materials. A single industrial-size wind turbine needs three metric tons of copper and a ton of four rare earths for the manufacturing of permanent magnets: neodymium, praseodymium, dysprosium, and terbium. And then the electricity transmission requires vast amounts of copper and aluminium, with copper being the cornerstone for all electricity-related technologies.  

The need for energy independence

Importantly, Russia’s invasion of Ukraine has reinforced the need for greater independence from fossil fuels, as well as the role of renewable energy in global energy security. This highlights the risk of underinvestment in clean power. Soaring prices of energy and raw materials since the invasion suggest the world could be in for a prolonged period of elevated energy costs, posing a risk to consumers, businesses and central banks’ price stability objectives. This hit to economic growth, and the geopolitical instability caused by the energy crisis, will hopefully focus attention on the necessary push for a less carbon-intensive global economy.

The implementation challenge

There are no quick fixes. The energy industry is enormous and energy technology doesn’t scale quickly like a tech company. Building out capacity can take decades, especially with the long and protracted regulatory hold ups faced today to gain permits for new projects. There is no easy solution. However, there are offsetting forces. Battery efficiency is increasing, and storage costs are falling. Rising investment and technological advances could help with the scalability and cost issues of green hydrogen production, which is hoped to be one of the sources of energy replacing Russian gas. From 2030, the amount of EV batteries reaching the end of their ‘first life’ will surge. And experts believe that with enough investment, some of the world’s clean energy metal requirements could be met by recycling EV batteries into ‘second life’ batteries. There could also be an increased drive by individuals to reduce their carbon footprint by changing how we travel, eat and live.

Nicolas Deschamps

Head of Client Group and ESG

I joined Architas in January 2015 to lead the Client Group. This sees me developing and promoting investment solutions to AXA entities and institutional clients globally. I also manage the relationships with major asset management groups working with AXA.

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Architas view

Our view

Globally we may need to get used to intermittent supply shortages, disorderly markets and spells of elevated price volatility. A coordinated international initiative by governments, central banks and companies will be needed to secure the massive investment required for future energy supplies, able to protect the environment. The reflationary effect of the green transition is a challenge for the global economy, policy makers and consumers. As the energy crisis and ‘greenflation’ continue, supply chains are disrupted, and global growth forecasts are trimmed back. Now is the time to formulate a coordinated global strategy to create an ethical, prosperous, climate safe and energy secure world. 

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