Efforts to limit the temperature rise to the Paris Agreement target of 1.5 degrees Celsius above pre-industrial levels will drive inflation up by 1.6 percent over the next decade, before this effect gradually subsides. This conclusion comes from a study by Lloyd McAllister, Head of Sustainable Investing, Chief Economist Raphaël Gallardo, and Commodities Specialist Michel Wiskirski of Carmignac, whose findings were exclusively reviewed by finews.com.

Doing Nothing Would Be More Costly

«We are gaining a better understanding of how inflation is driven by the energy transition,» says Lloyd McAllister. One key insight is that this process will not be a zero-sum game. «An inflation rate of 1.6 percent per year is still better than doing nothing,» he asserts. The consequences of global warming and resulting environmental damages would be exponentially more expensive. The European Central Bank estimates that without mitigation initiatives, the physical impacts of climate change could alone increase annual overall inflation by 1 to 3 percent over the next decade.

Demand for Metals and Minerals Increases

The shift to a sustainable energy system will create demand pressure on specific resources. Metals and minerals needed to produce new energy sector investments—such as wind turbines, solar cells, batteries for electric vehicles, and grid infrastructure components—will be in focus.

Simultaneously, there will be a negative supply shock: fossil fuel producers will reduce or halt investments in maintenance and upstream hydrocarbon extraction activities. This will ultimately reflect in inflation.

Economies of scale remain an issue, as many areas like green cement or steel are still not cost-effective. Progress in innovation or regulatory frameworks is needed here.

Challenge for Central Banks

According to the Carmignac experts, all these factors will lead to an additional inflation increase of about 1.6 percent per year, which will only start to fade after around ten years, once the investment cycle peaks. «The prolonged transition phase of the energy shift will pose significant challenges for monetary policy and central banks as guardians of price stability,» the authors argue.

They will need to decide whether to accept this temporary inflation, risking a de-anchoring of inflation expectations, or to counter it, potentially provoking deflation in other areas of the economy.

The ideal scenario, according to the authors, would be global cooperation on monetary policy. Central banks would adopt a coordinated approach to avoid expected spillover effects from import prices, currency effects, and global interest rates. However, they express doubts about the feasibility of such cooperation, particularly questioning whether the Federal Reserve would join in.