Europe is likely to be a test case of how much inflation a country or region is willing to bear on its path to clean energy. Costs are rising in Europe, as LNG markets tighten and as carbon prices rise. The net result is increased power prices, with reports of unhappiness in many countries – this is a topic we have discussed at length in our dedicated ESG and climate work and was a focus of last week's report – linked here.
Source: Bloomberg, C-MACC Analysis, September 2021
The exhibit below shows the scale of the emissions problem in China and maps the build-up of carbon emissions with a view of how that now needs to be corrected. The emission challenges that the US and Europe are facing are minor compared with what China will need to deal with to get close to the country’s stated position of net-zero by 2060. One of the issues we discussed last week was the need for the continued use of fossil fuels for decades to come and this will be especially true in the developing world where power, industrial and vehicle demand continues to grow quickly. Broad agreement on this idea at and around COP26, with support for a plan whereby the US and others can keep supplying large parts of the world with LNG, albeit lower carbon LNG, would go a long way to getting alignment on policy and would provide many developing nations with an energy framework that would make both social and economic sense. What we do not need are one-off agreements or legislative ideas that set unrealistic precedents. The likely inflationary impacts of some of the more draconian proposals are only now beginning to sink-in in the west and it would alienate many of the developing countries if they were pressured to adjust in ways that were too expensive or that constrained growth.
Source: Platts, September 2021
