Net zero ‘to fuel a decade of global inflation’

uk wind turbines

The world’s transition to net zero will add 1.6 percentage points to inflation annually for the next decade, a large investment firm has warned.

French asset manager Carmignac has said that central banks will struggle to keep inflation under control because of the high levels of spending needed for green energy projects.

Pressure on consumer prices will be driven by a wave of investment amounting to 2pc of global GDP, rising oil costs, and fossil fuel industries becoming obsolete.

This will put governments at odds with central bankers obliged to raise interest rates to fight inflation amid a scramble to raise trillions of dollars of capital.

Raphaël Gallardo, Carmignac’s chief economist, said that central banks and policymakers would be faced with a dilemma of prioritising low inflation or a faster transition.

Mr Gallardo said: “[Central banks could] say our goal is price stability, which we interpret to be 2pc. To avoid the possibility that inflation rises to 3.6pc for 10 years, we need to hike interest rates very rapidly and dramatically.

“But that would be in conflict with the objective of the Government to achieve the energy transition. It would create a lot of problems because the cost of capital would be much higher.”

This conflict means that “the next 10 years are going to be very tricky for central bank independence”, he added.

As “dirty” energy industries fall out of favour over the next decade, maintenance and investment in industries such as oil and gas will likely slow.

Carmignac noted that would lead to a drop in output, prompting oil prices to rise by 20pc a year.

Such factors would contribute 0.8 percentage points to inflation a year over the next decade, while higher investment and new green technologies being more costly at first would add the remainder of the 1.6 percentage points annual increase.

Mr Gallardo warned such factors could derail the transition as governments came up against hard choices.

He said: “The objectives of the transition will be put to the test when we have more shocks coming from the political side and markets because it’s very costly and also regressive.”

However, this poses a “false dilemma” as standing idly by as global temperatures rise would over time prove even worse for inflation, he warned.

Mr Gallardo said: “Letting CO2 concentration in the atmosphere continue to rise would create climate instability. For sure, there will be inflationary impacts that will last much more than 10 years.”

Carmignac estimates that the physical impacts of climate change would raise inflation by 0.8 percentage points to 1.3pc annually over the next decade.

But whereas the inflationary impact from the net-zero transition is temporary, without sufficient intervention inflation from climate change would continue and worsen after 10 years.

It presents a difficult situation where poorer households and countries in either eventuality will suffer more from higher prices, Carmignac warned.

It also comes at a time when governments are struggling to bring down historically high debt levels after Covid and the energy crisis.

Mr Gallardo said: “We know climate change is increasing inequalities and the transition will impact low-income households and countries more. It will clash with other political imperatives like reducing inequalities but also with market pressure to rectify the fiscal trajectory in most developed countries.”

Sign up to the Front Page newsletter for free: Your essential guide to the day's agenda from The Telegraph - direct to your inbox seven days a week.