SINGAPORE – Decarbonising the global economy will induce inflation and trigger a major labor market reset, said Mr. Ravi Menon, chief executive of the Monetary Authority of Singapore (MAS).
However, an orderly transition to a greener economy could help keep both inflationary pressures and labor market disruptions manageable, he said at the Economic Society of Singapore’s annual dinner on Wednesday (August 17th).
The MAS chief said the Bank of England (BOE) estimates UK inflation will rise by nearly 0.6 percentage points by the start of the 2020s if there is an orderly transition towards net zero, but by 2 percentage points by the early 2030s if the transition is disorderly. .
BOE estimates are based solely on climate change and associated transition risks and do not include sources of the current price spike due to factors such as supply chain disruptions and geopolitical tensions.
According to the BOE, a delay in implementing net-zero transition policies can lead to disorderly measures, such as a sudden increase in carbon prices or a massive withdrawal of investment from the traditional fossil fuel industry. , leading to excessively high energy prices.
Mr Menon said that even in an orderly transition, inflation would likely rise as emissions will have to be taxed to meet net zero targets.
“The right carbon price sends a powerful signal to the whole economy,” he said.
“It incentivizes consumers to reduce demand for carbon-intensive goods and services, businesses to switch to low-carbon technologies, innovators to invent and develop new low-carbon products and processes, and investors to fund and market them.”
However, higher energy prices will affect the production of many goods, and prices will rise overall.
“I think inflation is going to be higher than what we’ve seen in the past,” he said, referring to the last decade when inflation was so low that central banks in major economies lowered their interest rates to near zero.
In Singapore, consumer prices have averaged just 1.5% over the past decade. But headline inflation in Singapore hit a ten-year high of 6.7% in June this year and in the UK it hit a 40-year high of 10.1% in July.
Mr Menon said the move to decarbonise energy production and consumption by stepping up investment in solar, wind and electric vehicles will lead to increased demand for metals and minerals such as copper, l aluminium, cobalt, lithium, nickel and rare earths.
According to the International Energy Agency, an autonomous intergovernmental organization based in Paris, a world on track for net zero in 2050 will need six times as much of these materials in 2040 as it does today.
“The result is greenflation, or rising prices for those metals and minerals that are essential for renewable energy and technology,” Menon said.
“We’re probably seeing a glimpse of that scenario right now,” he said, referring to the surge in prices since last year.