Alongside a potential bifurcation of US and China poles, the fight to achieve net zero emissions by 2050 will still constitute the overarching investment principle driving capital allocation and global economies over the next couple of decades.
There are two takeaways from this. First, the rise in defence and energy spending currently being earmarked by governments globally will have to occur alongside a jump in required renewable energy investment (public and private). Secondly, and related to this, any delay in making progress towards the Paris climate goals today, will prompt an acceleration of investment at a later stage, exerting even greater upward pressure on the price of capital goods.
Isabel Schnabel’s recent speech on “greenflation” was important for its allusion to the potential for a rise in terminal rates, suggesting that the scale of investment required for the green energy transition could reverse some of the decades-long slide in government bond yields. A doubling of global annual investments required for the green energy transition constitutes a material change for the global economy.
But the cost of investment goods is already rising. The US PPI for private capital equipment climbed 1.0% m/m in February and the annual rate accelerated to 8.0%, the fastest since January 1982. The ramp up in investment required for net zero, which will have to accelerate significantly over the next five years to hit 2030 targets, will have to occur alongside much higher prices for investment goods. The transition to renewables could be more expensive than currently forecast. The recent jump in steel prices in Europe is a case in point.
