“Greenflation” for energy transition resources could derail Germany’s climate plans – analysis

Quickly rising prices for raw materials needed to build a fossil-free energy infrastructure could become a severe problem for Germany’s energy transition, consultants of the German Economic Institute (IW) found in an analysis for the Bavarian industry association vbw. Resources needed for car batteries, wind turbines, solar panels and other energy transition products are becoming increasingly costly on international markets and a dominant position by just a handful of suppliers leaves customers vulnerable to trade barriers, the consultants found. Companies could therefore struggle to guarantee a steady supply of critical materials like copper, cobalt, lithium or platinum, which means that the German government as well as the EU need to stand in for their businesses and help secure access to raw materials, the industry association concluded. Ruchir Sharma, head strategist at U.S. investment bank Morgan Stanley, told media outlet Redaktionsnetzwerk Deutschland (RND) that rising demand for these materials amid a global push to decarbonise energy systems could lead to “greenflation”. This would set in motion a spiral of higher prices, with potentially grave effects on climate action plans around the world in the coming years. Prices for lithium, a key element for car batteries, for example, rose 240 percent last year. Stricter supply chain and extraction standards could further exacerbate the problem, Sharma added. Rudolf Hickel, researcher at the University of Bremen, told RND that greenflation could also create “severe” political problems, as price hikes in energy markets and the new national carbon price were already putting a strain on many customers throughout 2021. “I’m very concerned that we’ll ultimately lack the acceptance that we need – and that this could let the entire project fail,” Hickel said.

Raw material supply for clean energy infrastructure was a largely neglected issue in the early stages of Germany’s energy transition but is quickly shifting into the focus of many companies as production plans for renewable power installations, e-cars, grids and hydrogen production are scaled up around the world. Resource supply strategies need to take into account tightened rules for supply chains in Germany and the EU as well as tougher rules for the funding of new projects in the context of the sustainable finance transition. Many observers hope that a greatly improved recycling system for critical materials, a better implementation of circular economy principles, technological improvements and new sources for required materials can alleviate the problem.