Climate change will keep inflation stubbornly high and result in low investment returns for an extended period, Nicolai Tangen, the head of Norway’s $1.3 trillion oil fund, is warning.

Tangen told the Financial Times on April 25 that “inflation is going to be tough to get down,” alluding to a multitude of factors, such as rising labor costs and higher food prices. These, he noted, could keep inflation elevated for years.

A part of the “mosaic,” according to Tangen, is that the exorbitant investments being made in the green energy transition and the deglobalization initiative currently occurring also will add to inflation pressures.

The idea of “greenflation”—that is, the transition to green energy to achieve climate change goals that will contribute to inflation—has been a common discussion in economic circles.

But is it largely an unfounded concern, or is it an accurate expectation?

The Threat of Greenflation

Isabel Schnabel, a member of the executive board of the European Central Bank (ECB), told a panel in March 2022 that the transition to a green economy will come with a cost: higher prices. But the German economist conceded that it’s necessary to shift to a net-zero economy.

However, she explained that greenflation would lead to fiscal and monetary consequences, forcing policymakers to help families grappling with rising energy prices.

“As more and more industries switch to low-emission technologies, greenflation can be expected to exert upward pressure on prices of a broad range of products during the transition period,” Schnabel stated.

Isabel Schnabel in Frankfurt, Germany, on Nov. 22, 2019. (Ralph Orlowski/Reuters)

“The transition to this new steady state will not come for free,” she said, adding that the price of this “new age of energy inflation … is worth paying.”

Schnabel isn’t the only one warning about greenflation.

TD Bank published a research note on March 22 explaining that the global economy should “expect moderately higher inflation as a result of the transition to net-zero emissions.” The paper noted that there would be four factors that would trigger green inflation: greater global capital investment, higher demand for commodities (e.g., carbonate, cobalt, nickel), green premiums, and carbon pricing.

“While inherently imprecise, …