Andrew Bailey, the governor of the Bank of England, has suggested that cutting carbon emissions in the UK could lead to “permanent price level effects” on the economy.
Bailey, who was present at the recent COP26 climate change meetings as a delegate, spoke of a potential permanent increase to price levels in an interview with the BBC. In the interview, he spoke of a potential overhaul to the current financial system if the UK were to reach net zero in carbon usage. Bailey stated that the price level increases could be a necessary part of the shift to net zero, and that the general public should be aware “that this is the transition path we have to do”.
The recent COP26 talks most notably highlighted the cutting of fossil fuels such as coal, with more than 40 countries making the commitment to shift away from coal, and 20 pledging to end public financing for international fossil fuel projects by the end of 2022. However, this commitment to the shift away from carbon-based fuels is unlikely to be without consequence on the economy.
We have already seen the real-world impacts of the beginning of this shift in recent months, as demonstrated most clearly by the highest gas prices seen in decades. As the government looks to move their production away from the most harmful carbon-based fuels such as coal, the demand for less environmentally harmful hydrocarbons such as gas is likely to continue increasing. With increasing demand comes increasing prices, and it is likely that the rise in our gas and electricity bills is just the beginning of a more serious shift in price levels within the economy.
Fuel prices provide a base price setter for many aspects of the economy. As coal is such an important factor in the production of a huge proportion of goods and services worldwide, the forced phasing out of its use could see a domino effect on costs of production, and thus producers shifting that increased cost onto consumers to maintain profits.
However, the governor insists that these price increases are a necessary part of the move to more renewable energy sources, as the unchecked progression of climate change could pose even more of a economic threat in the long term. Without such a transition to less harmful energies, the world may never move forward in its fight against climate change.
As is the case with many other limited natural resources, coal will not last forever and the switch must be made soon, or else prices will rise exponentially on their own. Additionally, the earth could face irreparable damages from the continued use of such harmful carbon emitting fuels. Unfortunately, it is us the consumers that will see the financial implications of such changes, and it is likely we will simply have to grit our teeth and bear it if we want to see any real development in the fight against climate change in the immediate future.