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Diane Francis

Diane Francis

Posted: May 7, 2009 10:52 AM

Ecoflation -- Business Beware

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Optimistic stock markets are betting that the Great Recession may have hit bottom despite the devastation in American banking and auto sectors. But punters have yet to build into price forecasts inflation and the newly-coined phenomenon of "ecoflation."
It is a particularly clever pun used by Reuters' environmental reporter and describes the rising cost of doing business due to a "changing climate."

Whether that refers to global warming (hotly disputed) or the increasing overhead involving government regulations and environmental compliance is anyone's guess.
But the facts are that these enhanced business costs will end up being passed along mostly to consumers than to taxpayers.

Consumers will pay more for everything, a form of green inflation, notably in developed countries where environmental activists and laws are demanding better remediation, recycling or responsiveness to concerns. They will also pay more for commodity scarcities which will result in higher prices as economic growth resumes and Chinese, Indians and others strive toward indoor plumbing and a US$2,000 Nano car by Tata Motors.

Here comes the judge
Tougher environmental laws at home, combined with border bans against imports from countries who don't have tough laws, will impose an enormous and irreversible economic cost. Remember everything is grown or mined and agriculture and resource extraction industries are the biggest culprits environmentally.

New standards will also cost taxpayers because governments will have to subsidize industries or individuals in order to keep the lights on. Alternative energy sources -- wind or solar -- are up to 10 times more expensive than dirty coal or other fossil fuels. If they are mandated, they will be job-robbers unless governments eat some of the costs to prevent industries from moving away, shuttering or consumers from cutting back on other spending, thus costing jobs.

The end of the age of fossil fuels is at least a generation away and the cost of carbon taxes, carbon recapture, alternatives, nuclear or cap and trade will reduce economic growth as well as jobs.

Not all bad
The only positive in rich countries is that ecoflation will also result in the repatriation of manufacturing and other jobs if transportation costs soar through tariffs, carbon taxes or commodity price spikes. Shipping cargo long distances then trucking it to local markets may be replaced by smaller, regionalized manufacturing operations and hubs close to consumer markets.

"Ecoflation could hit consumer goods hard in the next five to 10 years, according to a December report by World Resources Institute and A.T. Kearney, a global management consulting firm," wrote Deborah Zabarenko with Reuters recently. "Companies that make fast-moving consumer goods, everything from cereal to shampoo, could see earnings drop by 13 percent to 31 percent by 2013 and 19 percent to 47 percent by 2018 if they do not adopt sustainable environmental practices."

Then there's the weather costs as environmental degradation takes a toll.
"The costs of global warming are showing up now in the form of worse heat waves, droughts, wildfires and possibly more severe tropical storms but they are not yet reflected in consumer prices," she wrote.

Estimates are that major economies may impose a US$50-a-ton price on carbon emissions beginning in January, estimate experts. This is five to 10 times' higher than the current voluntary carbon market in the U.S.