Inflation and Net Zero

Imagine a factory that dyes wool. The waste chemicals just get discharged into the river that runs by the factory. Fish get killed, but the factories costs are minimized and consumers benefit from cheaper coloured clothes. It’s hard to quantify, but clearly the benefit of those clothes being available for less is offset to a degree by the harm to the environment. This harm is an externality, a cost imposed on a party that’s external to the contracting parties (the factory and the consumer, presumably intermediated through some garment producers).

Now the government decides that this sort of thing is intolerable and imposes an obligation on the factory to clean up its act and dispose of the harmful effluent safely. It does so, but this costs money, which ends up being paid by those who ultimately consume the product. The world is (probably) no worse off, but measured inflation has gone up.

Net Zero will work like this. If we all live in passivehausen, and drive around in Teslas using electricity from wind turbines there will be a cost (and probably a big one). This cost will show up in inflation measures. We may have saved the planet, but it won’t be free. It won’t even be cheap. So, I think we have several decades of elevated inflation to look forward to.

After we’ve transitioned, maybe inflation will crater, but this won’t be quick and it will push up yields. Now, the current inflation induced by the pandemic/Ukraine/re-shoring may drop and we normalize, but the Inflation Reduction Act in the US, and counter-measures in Europe (and Japan?) will push up prices of consumable like energy, and when energy gets expensive, everything does.

When will this happen? I may not be smart, but I’m not so stupid as to attempt to put a timescale on this!