Net Zero Policies Can Impact UK Inflation Rate, Warns BoE Economist

Policies targeting climate change, such as carbon taxes and emission trading schemes could risk raising costs for families, according to Catherine Mann.

Undated image of credit cards and pound coins. Dominic Lipinski/PA

The impact of transitioning to a net zero economy on inflation is of concern to monetary policymakers, the Bank of England’s (BoE) economist has suggested.

Ms. Mann is a member of the BoE’s Monetary Policy Committee (MPC), which sets the bank rate and directs the government’s monetary policy.

Having voted for a higher interest rate of 5.5 percent in the latest MPC votes, Ms. Mann said that climate mitigation policies can affect British macroeconomics. This includes inflation rate, interest rate, labour market and investment.

Speaking at a University of Oxford event, Ms. Mann has argued that government policies, targeting climate change, such as carbon taxes and emission trading schemes (ETS), risk raising costs for families.

British households could see higher bills, as companies pass the extra costs of environmental policy requirements on to the customers. This prompts a change in behaviour needed to reduce emissions, Ms. Mann said.

“Consumers themselves can demand products and services with a lower carbon footprint, thus raising their prices at least initially, which induces firms to invest in these less-emissions-intensive products,” she added.

Economists have warned of the “macroeconomic effects of climate policies,” Ms. Mann told the audience.

“So far, evidence has suggested upward pressure on inflation, downward effects on output, and generally a tendency for climate pricing shocks to be more persistent and volatile,” she said.

Carbon taxes, public investments, and subsidies have all been found to be inflationary, the BoE’s economist said.

She added that in countries with a lower-carbon intensity of the GDP, the effects of climate policies may be “quantitatively small.”

Carbon intensity of GDP evaluates how efficiently an economy uses carbon-based resources to generate economic output. Recent figures show Britain’s value of carbon intensity are lower than those of the U.S. and China.

However, in the medium and long term, the response to climate policy shocks in macroeconomics is significant, Ms. Mann said.

Net Zero Policies and Inflation

Ms. Mann’s comments come amid historically high inflation rate for the U.K. economy, currently at 6.7 percent. The government and financial bodies are keen to halve the inflation by the end of the year and eventually achieve the 2 percent target.

In order to curb inflation hikes, the BoE would usually raise the interest rate, which it has been doing consecutively for almost two years.

One of the tools to change interest rates, quantitative easing (QE), involves the BoE buying bonds to push up their prices and bring down long-term interest rates. It was used in 2009, in the aftermath of the global economic financial crisis.

Last month, Chancellor Jeremy Hunt, admitted that implementing QE–after the lockdowns–led to inflationary spikes.

Ms. Mann has warned that “quantitative effects are likely to rise” overtime, as “carbon pricing policies have more bite.”

Not every climate event will require monetary policy action, she said. But monitoring the impact is essential in order to achieve the two percent inflation target “sustainably in the medium term,” Ms. Mann warned.

Her remarks come after a government roll-back on some net zero policies. In September, Prime Minister Rishi Sunak extended the net zero deadlines.

This includes phasing out petrol and diesel vehicles by 2035, instead of 2030, new buildings with fossil fuel boilers by 2025, and oil and gas boilers in existing buildings by 2035.

A net-zero economy is high on the priority list for both the Conservative and Labour parties ahead of the next general election.

In response to Mr. Sunak’s announcement on net zero policies, Labour leader Sir Keir Starmer said he will undo the changes and reverse back to initial deadlines.

Ms. Mann acknowledged that policy design is “outside the scope of most monetary policymakers’ remit.”

However, she noted that it all comes back to macroeconomics getting affected–and this is “key to central bank decision-making, specifically inflation and economic activity.”