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Government policies to mitigate the impact of climate change will stoke inflation, but delaying them could depress economic growth and investment returns, according to investment strategists.
Policymakers face a trade-off between the high upfront cost of moving quickly towards net zero carbon targets, and the long-term damage to economic growth caused by rising temperatures if they delay action, they said.
"As global policy kicks into gear and brings the transition risks associated with reducing emissions to life, the accompanying rise in carbon prices from a very low base poses meaningful upside risk to inflation over the next few years," said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International in a report on August 16.
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The inflationary impact on China could rise from one percentage point this year to 4 percentage points in 2026, before easing to almost zero in 2031 and turning negative after 2043, he projected. While the impact on the US and Europe - whose combined emissions are less than China's - would be around half or less than in China.
Such potential inflation from the extra costs of doing business because of efforts to decarbonise are underestimated and not yet accounted for by the investment markets, Ahmed reckoned.
Carbon prices refer to the cost of buying emission quotas or taxes on emissions generated while doing business. Investments on infrastructure and industrial processes to abate emissions and improve energy efficiency also add to costs.
Christophe Donay, Switzerland-based Pictet Group's head of asset allocation and macro research, expects less dramatic inflationary pressure.
With climate mitigation measures, inflation could average 3.1 per cent in China and 2.1 per cent in the US between 2025 and 2030, both barely 0.1 per cent higher than without mitigation, Donay forecast in a report last month.
The average inflation rate for the decade to 2020 was 2.52 per cent in China and 1.73 per cent in the US.
Still, given rising inflationary pressure, adopting an investment strategy that involves a range of real assets like properties, commodities and gold may protect against inflation, he said.
Thanks to large investments in green technologies, global warming mitigation measures could see annual economic growth in China average 4.8 per cent between 2025 and 2030, above 4.7 per cent if no action is taken, Donay said.