The aim of this commentary is to give a qualitative description of the effects of climate transition that can be expected on inflation in the coming decades. This means that it only shows the direction in which the various effects can be expected to impact inflation. It is more difficult to quantify the effects. Their more precise size, when they will have the greatest impact on inflation and what their overall effect will be at any given time, is determined by a complex relationship between consumption, production and technological development, as well as by the fact that the pace of climate transition is largely determined by future political decisions.
Possible effects on the economy as a whole have been studied in various contexts, with the aid of simulations in econometric models. These often indicate that the transition will be relatively smooth and that the effects on the world economy will be relatively small. See Bylund and Jonsson (2021) for an overview of the economic consequences of different climate scenarios that the Network for Greening the Financial System (NGFS) has estimated using models. McKibbin, Konradt and Weder di Mauro (2021) find in their simulations that climate risks and transition risks associated with a carbon dioxide tax have long-term negative effects on production, but transitory effects on inflation. However, there is considerable uncertainty and some observers believe that significant problems will arise during the transition. See, for example, Pisani-Ferry (2021).
Finally, it should be stressed that if the climate transition were to lead to higher inflationary pressures than in recent decades, this would not necessarily be a problem. In recent decades, structural forces such as digitalisation and globalisation have contributed to low inflationary pressures. This in turn has meant that many central banks have had difficulty in bringing inflation to the target, despite cutting policy rates to historically low levels, at or near the lower bound. If the underlying pressure on inflation were instead upwards in the future, there is no corresponding restriction on using the interest rate tool to maintain the inflation target. Instead, it could help to ensure that central banks' policy rates can move more permanently away from the lower bound.