‘Fossilflation’ an opportunity to avoid disorderly transition, says NGFS

September 14, 2022|Written by |Network for Greening the Financial System, Bank of International Settlements

A new paper from the Network for Greening the Financial System (NGFS) argues that the current increase in fossil energy prices is acting as an involuntary price on carbon, offering a “narrow but unique opportunity” to accelerate the transition to net zero.

Released as an update to the third iteration of NGFS climate scenarios, it outlines the growing odds of a late and disorderly transition. However, the report says this can be avoided through appropriate carbon pricing mechanisms and by a major reallocation of capital to fund energy efficiency, storage technologies and renewable production.

“If fossil fuel prices are simply maintained at current level, there is no further inflationary impact,” the NGFS says. “Therefore, turning to price stability, central banks are well placed to secure the return of inflation to low and stable levels even without such windfall deflationary effects of future decreases in fossil fuel prices.”

The paper compares current fossil energy price developments with price trajectories outlined in the NGFS scenarios. The paper shows that, between 2020 and June 2022, oil prices have already increased by the amount required under the 1.5ºC orderly scenario by 2040, which is the equivalent of a US$144 increase in global carbon tax.

Locking in further dependence on fossil fuels in an attempt to stabilise prices would increase the odds of a late, disorderly and more expensive transition, the paper says. In contrast, carbon pricing and a shift in financial flows towards renewables could build on the impetus of current “fossilflation” to help the world reach net zero, perhaps earlier than expected.

“The current crisis, with all its tragic dimensions, represents also a unique opportunity to take decisive action toward the net zero transition,” said Luiz Pereira da Silva, deputy general manager of the Bank for International Settlements, who led the team behind the paper. “Its longer-term benefits are even stronger, especially after the relative price shift with the sharp rise in the cost of fossil fuel.”

“Climate change is not taking a pause for the current energy crisis; natural disasters are increasing in frequency and intensity,” said NGFS chair Ravi Menon. “We must seize the opportunity presented by the current high prices of fossil energy to accelerate investments in renewable energy and substantially increase energy efficiency. The financial sector must stand behind this effort.”

The recent spike in global energy prices is not reflected in the new versions of the NGFS scenarios, which were largely completed before Russia’s invasion of Ukraine. The new scenarios are the most detailed issued so far, incorporating for the first time data on potential losses from extreme weather events.

Country-level emission commitments have also been added, as well as the latest trends in renewable energy and other mitigation technologies. Other additions to the scenarios include updated GDP and population projections, improved modelling of physical climate risks, and an increased sectoral breakdown.

This page was last updated September 14, 2022

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