What the green transition means for the economy
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Federal Reserve chair Jerome Powell began 2023 with a blunt statement: "We are not, and will not be, a 'climate policymaker.'"
- Still, in recent months, officials around the world have questioned how climate change and the transition away from fossil fuels will complicate policymaking.
Why it matters: Top policymakers warn that the global economy is entering a more uncertain, volatile period. Climate change is one key reason why.
State of play: Nations and companies will devote huge sums of money to adapting and mitigating climate change, which may exert upward pressure on interest rates and inflation.
- More extreme weather events could mean more frequent supply shocks — costly but hard-to-predict disruptions to output that introduce more volatility into the economy.
What they're saying: "There's going to be this climate change adaptation and mitigation with a huge reallocation of capital and labor migration," Glenn Rudebusch, a former Fed economist, tells Axios.
- "There are potential long-run effects that the Fed will have to navigate and react to in terms of growth and productivity," Rudebusch says, adding that soaring investment demand might raise the neutral rate that neither restricts nor boosts the economy.
What to watch: Some policymakers, including San Francisco Fed president Mary Daly and the European Central Bank president Christine Lagarde, have warned that the green transition could ignite price pressures.
- To transition to a greener economy, companies are already making massive investments in new infrastructure. That raises the possibility those firms will pass on some of those costs to consumers.
Yes, but: Climate change and the response to it "will certainly create relative price changes, says Michael Strain, director of economic policy studies at the American Enterprise Institute.
- "But there are lots and lots of relative price changes in the economy every day, so I wouldn't expect this to be a disproportionate driver of relative price changes."
The intrigue: Those down-the-line risks are at odds with the current economic moment.
- Interestingly, the green transition most recently introduced an unexpected economic risk: Electric vehicles — and the problem they presented to current jobs — were a key reason autoworkers went on strike; the walkout threatened more chaos for America's supply chains.
- Meanwhile, some clean energy projects are on hold — or have been canceled altogether — due in part to higher rates.
- The Inflation Reduction Act provided billions in incentives to help nudge along the green transition. But with bigger concerns about the budget deficit, it's unclear whether that trend continues.
- The hype around green investments has waned: Shareholder appetite for investing in green technology has slumped.
The bottom line: These may be short-term dynamics that prove to be fading. In the long term, policymakers face big questions about how the green transition — and more extreme and frequent climate events — will affect the economy.
