The FT website published an article entitled “ECB executive warns green energy push will drive inflation higher”. “Isabel Schnabel says low-carbon economy 'poses measurable upside risks' to inflation projections over medium term” medium-term inflation risk).
Not to be unfair to Ms Snabel, the terms of her mandate have been set at the political level and generally relate to keeping inflation close to 2%. What I disagree with is how the issue emerges and the entrenched instinct that inflation is something negative.
In a free economy, price is the inclusion of countless information in a number. In this way it facilitates transactions, sends messages and directs its economy and resources. If we did not have a price to buy iron, how and who would decide how much iron would be produced, where it would be channeled, in return, and whether new investments or plant closures would be needed in the future? I know there are weaknesses and problems, as well as room for improvement in this mechanism, but for a few millennia it continues to be the most effective mechanism that has been tested and survived. So price change is not the problem, but the messenger. That's why we have to be careful what we shoot.
One of the weaknesses of the above mechanism is that the decision-making concerns a medium-term horizon. Moreover, what is today and what is medium-term for a businessman, a politician, a technocrat of the ECB is different. Most importantly it is very different from the time horizon of the world. If someone tells you not to eat a scoop of ice cream today and they give you two balls in 10 years, chances are you will send them off. Let's consider our decisions when it comes to third parties, and much more third parties who have not yet been born.
Protecting the environment is by no means easy. From both sides. Imposing a change that will increase the cost of running a business / sector if not done in a rational, timely manner and based on data rather than political slogans can lead to business closures, job losses and even delay in achieving the environmental objective. It is also wrong to think that turning to green energy is a risk… and to issue warnings, because that too gives weight to the ECB today.
Just as we all do not always buy the cheapest or are willing to pay more for… something more that is offered to us, so do environmental issues. Paying more for all products and services because I will live (or our grandchildren) in a better environment should not be an “inflation risk” but a conscious choice.
As I said, the issue of the environment is very difficult to deal with. The first obstacle is the removal of the subjectivity factor in the time horizon. Second is one of the arguments that a developing economy has: “You Westerners have been ravaging and polluting the world for two centuries and in this way you have been able to have more environmental industries, now that we have started to grow we have to pay the full cost. ; “Pay for the damage you did.” That's why statements and titles like the one above on FT do not help.
I close with a question: What will be the effect on inflation from the deterioration of environmental conditions (ventilation filters, awnings, cost of care… etc etc?)
* FT text is available at: https://www.ft.com/content/80cbd05f-d722-411f-9bbe-155cd8c06f7e
