This blog entry is an examination of a discussion that Gernot Wagner a climate economist at Columbia Business School had with Srijana Mitra Das and published in the Economic Times on Friday, 23rd February 2024. He is a Senior Lecturer in the Discipline of Economics in the Business School and is the Faculty Director of The Climate Knowledge Initiative. Takeaway from the discussion is that Companies now know climate risks means financial risks and industrial sectors need swift decarbonisation. The discussion struck a deep chord in me as I grew up in Steel manufacturing towns and in iron ore mining towns.
Dr Wagner discusses regarding terms like Green Moral Hazard, terms like ‘Climateflation’, ‘Fossilflation’ and ‘Greenflation’ that were introduced by Isabel Schnabel a member of the Executive committee of the European Central Bank, and; makes an example of the need for swift Decarbonisation in the Steel Industry and has been broadly suggestive on what can be done in the Steel Industry.
On Green Moral Hazard that comes with every climate technology – his take is that whenever there seems to be an easy techno-fix, there is also the paradoxical aspect that there might be a way out from doing the things which we know are necessary but are in fact harder and involve broader behavioral and societal changes. He cites the example of the seat belt in cars, (for green moral hazard) which is protective but also encourages people to often engage in slightly riskier behavior. On some of the ways climate uncertainty can even be priced he goes on to say that, we can quantify how much each ton of Carbon dioxide costs. Climate Watch also has data that shows the trendline of Greenhouse gas emissions by sector, Worldwide. He has observed a massive evolution over the last 10 years in the Corporate Sectors understanding of Climate change – they know that Climate Risk is Financial Risk. The businesses most affected by this phenomenon are Reinsurance companies who are acting as climate risk managers. They explicitly model climate change and explicitly incorporate global warming factors into their risk management.
‘Climateflation’ means inflationary increases due to extreme weather events and unmitigated warming. These cause price spikes when for instance, crops fail due to climate disruptions. ‘Fossilflation’ refers to oil, coal and gas. They are traded globally, hence when there is unrest in the middle east or disruptions like the invasion of Ukraine by Russia, fossil fuel prices spike, leading to inflation in the global economy. Both ‘Climateflation’ and ‘Fossilflation’ are intricately linked. Dr. Wagner also articulates that natural resource dependent industries like mining are vulnerable to this as are global supply chains. Regarding ‘Greenflation’ Dr Schnabel (Reference 3) has articulated in a speech that many companies are adapting their production processes to reduce carbon emission but most green technologies require significant amounts of metals and minerals, such as copper, lithium and cobalt, especially during the transition period. Electric vehicles use nearly 6 times more minerals than their conventional counterparts as per the International Energy Agency report, “The Role of Critical minerals in Clean Energy Transitions” published in May 2021.
In the steel industry, 80% of the steel industry’s emissions come from Blast Furnaces that add coal to iron ore and produce iron plus Carbon dioxide. For every ton of steel, more than two tons of Carbon dioxide are emitted. Steel itself is 100% recyclable – so alternatives to this way of production like material efficiency, recycling etc., can be considered. Using green hydrogen in primary production, stemming from renewables or low-carbon electricity being utilized in deriving hydrogen; could be variants, that can be considered in primary production.
2) https://www.ecb.europa.eu/ecb/orga/decisions/html/cvschnabel.en.html
3)https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220317_2~dbb3582f0a.en.html
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