Even before COP27 begins this week, many of us are distracted by the effects of inflation that haven’t been seen in decades. And many of us are looking to our politicians and policymakers to steer our economies back to a time when we can once again enjoy a low inflationary, high growth life.
But can we afford to live in a low-inflationary, high-growth world if we are to stop climate change?
In my simple mind (thankfully, I am in good company – Larry Fink from BlackRock, for one, seems to share a similar view), if we are to succeed in our fight against climate change, we’re going to have much higher inflation, at least for as long as we do not have the right technology to fix this global problem.
Why? Take two simple examples:
1) Methane is a major cause of climate change. In fact, it’s the second biggest contributor after carbon dioxide and responsible for about half a degree of warming. The 3.5 billion livestock in the world generate about 6% of greenhouse gas emissions (in comparison, aviation is responsible for less than 3% of greenhouse gas emissions).
Just as the aviation industry is being forced to reduce (or offset) its emissions, it is reasonable to assume that the cattle industry will have to follow suit – hopefully sooner rather than later. This will likely increase the cost of production which, in turn, will ultimately be borne by consumers.
2) The world is trying to wean itself off fossil fuels – no more so than in the automotive industry with the trend towards electric vehicles. However, electric vehicles require batteries, and batteries require a combination of mined metals.
But the typical side effects of mining are not good – air pollution, water contamination, and the destruction of habitats; ironically adversely impacting our fight against climate change even as the end product – the battery – could save us.
So the mining industry will have to figure out ways in which they can extract these metals without making the environment worse – these ways (whatever they are) will add cost to their process, which again, will ultimately be passed onto the consumer. Until impactful technology arrives and scales up, going green will not be cheap.
To make matters worse, policymakers’ continued pursuit of economic growth in business-as-usual sectors will unfortunately also mean business-as-usual emissions, business-as-usual environmental destruction, et al (unless coupled with said mythical green technology). How does that square with a collective global push towards net zero?
It appears to me that saving the world from climate change and the pursuit of low inflation / high growth are mutually exclusive. Our political leaders and we are going to have to prioritize and choose:
1) save the planet for future generations with the likely economic reality of a high inflation, low growth (at least until there is a miracle technological solution), or
2) continue to pursue business-as-usual economic growth and cross our collective fingers for said miracle technological solution.
So what does this have to do with gold? In this world of high inflation, the role of gold for the average investor has never been more compelling.