The economic impact of climate change is becoming increasingly apparent. To this point the focus has often been on the increased frequency of climate-related influences, their potential impacts on financial stability and the prospect of an increase in inflationary shocks.
While price increases for some products seems likely to continue, when considered in a broader context that fully considers the destabilising effects of climate change, it seems more like a deflationary influence on the global economy, than an inflationary one.
More than that, we need to increasingly consider what climate-related changes might mean for the economy within the forecast horizon.
Consideration of climate change risks has become an important driver of political attitudes. Capital is increasingly seeking exposure with solid environmental, social and governance (ESG) credentials; more listed companies report their climate-related financial exposure; financial institutions are quantifying the impact of climate change in their activities and adjusting their exposure accordingly; and the concept of climate-related activities is broadening from weather, to encompass a range of other aspects including waste, recycling and species destruction.
Government policy faces increasingly urgent infrastructure pressure. Consider water security in Chennai and Cape Town, and sea wall construction or even relocating for the sinking city of Jakarta.
Australia needs policy change and investment to protect the electricity grid as the use of solar panels reduces demand and sea levels threaten infrastructure in places like Port Melbourne and Cairns.
Technically, internalising the external costs of climate change into the inputs of the economy will raise some prices. As will supply-induced shortages of some products. But under current economic conditions, where incomes in most economies are constrained, do those price increases really present an inflationary threat?