Professor Wieland, what effects is the shift towards climate neutrality likely to have on inflation in Germany in the short and medium term?

Johannes Pennekamp

Responsible editor for economic reporting, responsible for “Die Lounge”.

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Of course, a rising price on greenhouse gas emissions affects energy prices, and thus inflation.

This is all the more true as long as fossil fuels make up the majority of electricity and heat generation and fuels.

In some cases, the effect can be calculated well in advance - for Germany, for example, when it comes to the Fuel Emissions Trading Act, which has stipulated a CO2 price for the transport and heating sectors since 2021.

The price in 2021 was 25 euros per ton of CO2 emissions.

Since this year it has been 30 euros and will rise to 55 euros per ton by 2025.

How does that work?

This is reflected in fuels used for heating and driving.

According to calculations by the German Council of Economic Experts, this is likely to have contributed a little more than one percentage point to consumer price inflation in 2021, both directly and via indirect price increases.

And then there is the European emissions trading.

Yes, there was also an increase in the CO2 price in European emissions trading from a good 25 euros at the beginning of the year to more than 80 euros per ton at the end of 2021 due to the economic recovery in the euro area. This price applies to the energy sector, industry and even domestic flights. But there were other factors that led to a drastic rise in oil and gas prices, not least the faster recovery of the global economy and various supply bottlenecks. In Germany, the inflation rate without the direct effects of energy prices was 3.4 percent in November, but with energy prices it was 5.2 percent. It is to be expected that the CO2 price will be even higher in the medium term if the EU reduces emissions certificates in order to reduce emissions.But an increase to 100 euros per ton, for example, no longer has as much of an impact on inflation as an increase of 25 and 80 euros as this year.

The goal is to expand this trade globally.

What would that mean for prices?

If more CO2 prices were raised around the world in order to meet the Paris climate targets, this would create even more inflationary pressures, at least until investments in new technologies and renewable energy production lead to a decline in the demand for fossil fuels.

But that will take some time.

The transition can be very expensive, especially if politics is not pragmatic and efficient.

This will take place very differently depending on the state.

Have these effects been underestimated in the ECB so far?

Effects that can be calculated beforehand, such as the German CO2 price in the heating and transport sector, should actually have been fully taken into account by the ECB. She may have underestimated the strong recovery in the global economy and demand in the euro area. However, like many other institutes, the ECB's inflation forecasts for 2021 were far off the mark. When I commented in February 2021 that inflation could well rise to 3 percent in 2021, I had to accept a lot of criticism. Didn't I know that the effects of the VAT cut and the collapse in oil prices would soon be out of the statistics again? Now the ECB itself raised its forecast for inflation in 2022 to 3.2 percent in December. In September it was still assuming a rate of 1.7 percent.As far as I know, there has never been a revision of this magnitude at the ECB staff.

Is the current high inflation in this country already partly due to the green transformation?