Climate change and inflation: The economic impacts of climate change

Businesses that are focusing on profits over the planet right now might want to rethink their priorities.

Environmental experts, economists, and thousands of CEOs believe climate change is at least partly a cause of inflation and could play an even larger role if businesses don’t reduce their carbon emissions, landfill waste, and other global warming contributors.

What’s the connection between sustainability and inflation? It goes back to basic economics. When supplies dwindle, demand naturally rises, bringing price increases.

In this case, we’ve seen climate-driven disasters impeding or killing crop production around the globe, which has a cascading effect on many other industries and economies.

In Texas, for example, farmers abandoned 74% of their planted crops, or more than 6 million acres, due to extreme heat and thirsty soil, according to The New York Times. Since the state is the largest producer of cotton, that meant prices spiked on everything from cotton balls and Band Aids to diapers and tampons.

“Climate change is a secret driver of inflation,” Nicole Corbett, a vice president at NielsenIQ, told the Times. “As extreme weather continues to impact crops and production capacity, the cost of necessities will continue to rise.”

Carbon emissions 911: Businesses must transform to climate economy

Global carbon emissions reached historic levels in 2021. Deep emission cuts are needed in the 2020s, and must be halved by 2030. Learn how to start today, because the world can't wait any longer.

Cause and effect: Climate change and inflation

Experts warn the connection between climate change as a cause of inflation will only become clearer as drought, fire, floods, rising temperatures, and other global warming related disasters continue increasing in frequency and severity, wreaking havoc on almost every area of our economic lives.

Indeed, the Environmental Protection Agency says “spikes in food prices after extreme events are expected to be more frequent in the future.” And The Hill points out that for every degree Celsius that the Earth warms, there’s a correlated 5% to 15% decrease in overall production.

“If we ignore it and don’t do anything about climate change, it will become a staggering cost,” Suzi Kerr, chief economist at the nonprofit Environmental Defense Fund, told the publication. “And it will have a huge impact not only on grocery bills, but many other aspects of our ordinary lives.”

For businesses, the message is clear: plan for this now or suffer the consequences later.

That doesn’t just mean building financial models to account for higher-than-expected operating costs and passing higher costs on to consumers. Rather, it suggests resisting the urge to focus on recessionary fears, and instead, really commit to the planet.

Circular commerce and retail: Greener the better

More and more consumers are prioritizing sustainability over price in their purchases, driving growth for retailers with green practices.

3 ways to slow climate change – and the inflation impact

This doesn’t have to be costly. In fact, here are three steps organizations can take to help slow climate change and reduce at least one of the causes of inflation, while also improving their long-term business prospects:

1. Audit your exposure
2. Embrace climate legislation
3. Commit to net zero – and mean it

Check for potential risk. Even in business, there’s a tendency to think “it won’t happen to me.” But interestingly, as PwC researchers note, when companies audit their potential exposure to climate change, their eyes often pop wide open. Real-world examples from the PwC report include:

• A conglomerate that discovered extreme weather events could cost it several hundred million dollars as soon as 2030.
• A large retailer that found dozens of its facilities were at elevated risk because of extreme weather.
• A global industrial equipment maker that learned it had to redesign a flagship product or face the prospect of it malfunctioning in areas where climate change was impacting the weather.

Embrace the Inflation Reduction Act. Signed into law last year, the IRA could be a huge business and jobs generator. Hailed as the largest climate legislation in U.S. history, it sets aside $369 billion for clean energy initiatives aimed at getting companies to let go of carbon-emitting fossil fuels. It also includes a multitude of potential tax credits.

American Clean Power, a renewable energy lobbying company, found the anticipation of IRA’s passage alone led to $40 billion of capital investment in “green” projects and nearly 7,000 new jobs. And more than 100,000 clean energy jobs have been generated in the US since the law’s passage, according to a report from the nonprofit Climate Power.

Make a real commitment. Thousands of companies have made public statements pledging to 45% reductions in carbon emissions by 2030 and reaching net zero by 2050. Will most get there? Not likely, according to the United Nations, which says commitments so far fall well short of climate plans laid out in the Paris Agreement.

Accenture, a global professional services firm, says 93% of companies need to “at least double the pace of emissions reduction by 2030” to meet their goals.

How to embed sustainability in your business – and bottom line

To achieve real benefits, companies need to embed sustainability into their business practices and processes. Learn three ways to do it.

Sustainability: Better for the planet and bottom line

If they’re able to do so, experts say such moves can lead to cost savings related to greater operational efficiency and productivity. They’ll help the planet and boost the global economy by curbing at least one cause of inflation.

Sustainable companies also tend to reap image benefits such as better brand value, stronger customer demand, and healthier market valuations.

Conversely, those that engage in “green washing,” where they make untruthful claims about their environmental commitments, often find themselves in public perception hot water.