To fight inflation, we must fight climate change

Next week we receive the latest figures on inflation. No doubt the dramatic, almost overnight, shift in consumption from in-person services to remote-ordered goods are part of the problem. So are mangled supply chains, as key workers miss work due to the coronavirus, here and overseas. And Russia’s brutal invasion of Ukraine has impacted global food and energy supplies. 

Largely ignored as an inflationary driver, however, has been climate change. Like the pandemic, climate change is a global problem manifesting itself in countless ways, many well-hidden. Unlike the pandemic, it will get worse, not better, for the foreseeable future.

If we wish to control inflation, we must address climate change now. 

Because climate change affects prices across many sectors, its impact is easy to miss. Think of a simple loaf of multigrain bread. If the bakery typically gets its wheat from a semi-arid region now undergoing a full-blown drought, finding an alternate supply will cost more. Perhaps the oats come from another region that has experienced flooding, destroying half the crop. With the same number of bakers competing for half as many oats, they will inevitably bid up the price. Much of U.S. barley production is out west, in regions prone to wildfires. If some barley burns, what remains will cost more. Even if millet is grown and harvested without incident, shortages can result if waves of powerful tornados destroy some of the silos where it is held. And although flax seed production might be fine, if hurricanes delay the ships bringing it to the bakery, bread output may have to be reduced for a while. 

Any and all of these factors can raise the price of bread. And because bread is such a prominent staple, when businesses see bread prices rise, they fear inflation and raise other prices, too. 

But it is not just bread. Extreme weather events and shifting weather patterns have caused global costs to soar across numerous commodities, from sugar and coffee to wheat and soy.

And it is not just food, either. Housing becomes more expensive as wood and other building materials no longer grow well where they were traditionally harvested. Soaring weather-related claims push insurance companies to raise premiums sharply or just deny homeowners coverage. Both state governments and private utility companies inevitably pass on costs of increasing major weather disasters, fire mitigation, and grid resilience. Transportation costs rise — and are rolled into almost all goods’ prices — as storms damage bridges and wash out roads. The list goes on. 

Some “supply shocks” are inevitable — and if they remain rare, price increases will be similarly rare, transient irritations. 

Climate change, however, is making all these events much more frequent. This leads to more frequent price increases that are much more likely to feed inflationary psychology, generating broader price rises even in the absence of specific supply problems. From the baker’s perspective, if short-term price increases are needed first in response to more expensive wheat, then to cover pricier oats, and then when shipping costs rise, it may be simpler just to raise the price of bread permanently. This is not wicked or predatory behavior: It is just business. But its effects can ripple through the economy.

Climate change drives inflation by fueling demand, as well. As storms’ frequency and severity increase, sea levels rise, and drought afflicts previously habitable areas, more people will compete for available housing elsewhere. Changing conditions require new or rebuilt infrastructure, increasing demand for building materials.

Product substitutions can cushion price increases, preventing them from feeding systemic inflation. When apple prices rise, people switch to pears; when potatoes are up, people dust off their recipes for rice dishes. 

Our long-time dependence on fossil fuels obstructs effective substitution for energy costs. Yes, over time we could shift from oil to natural gas and back, but with the same often unstable parts of the world producing a large part of the supply of both, many events raising the price of one also affect the other. Wars, revolutions, and other turmoil will interrupt our supplies repeatedly: Apart from Canada and Norway, few stable democracies are big net exporters of oil and gas.  

Rising fossil fuel costs produced “stagflation” during much of the 1970s, with rapidly rising prices and sluggish growth at the same time. Back then, few cost-effective alternatives existed. 

Despite near-record low unemployment, some writers worry that persistent inflation could adversely affect economic growth. Freeing ourselves from fossil fuel dependency is therefore crucial to containing inflation in the medium- and long-term as well as securing sustainable economic growth. And in the short-term, alternative energy now is actually cheaper than fossil fuels. 

These technologies’ advantages will ensure their eventual dominance, but we can reduce costs now with several provisions pending before Congress that would accelerate their roll-out. If we were to meet large fractions of our energy needs from each of several sources — solar, geothermal, wind, improved efficiency, and others as well as fossil fuels — we would have far less to fear from open war between the Saudis and the Iranians, from an insurgency in Indonesia, or from a capricious tyrant in South America’s oil patch. 

More generally, the best prescription for sustained economic growth without inflation is technological innovation. Incomes soared while prices remained stable between the early 1990s and the late 2000s as we undertook the enormous task of converting this country to the Information Age. A similarly transformative period is possible now with well-targeted incentives to innovate in renewable energy and build successful technologies to scale. Even more so than the jobs created in the tech boom, these positions would appear in all parts of the country and at all skill levels, truly lifting all boats. 

The pending congressional economic package’s clean energy provisions would counter climate change’s increasing disruptions of our supply chains and prepare the way for sustainable, non-inflationary growth for decades to come. Congress should expeditiously finalize and pass this legislation.

David A. Super is a professor of law at Georgetown Law. He also served for several years as the general counsel for the Center on Budget and Policy Priorities. Follow him on Twitter @DavidASuper1