Strong growth in renewable energy provided an important offset to China’s property woes last year. At the same time, US officials have warned China that Washington and its allies will take fresh action in response to overcapacity in EVs, solar panels and lithium-ion batteries. China hawks in US, and in Europe, are gaining the upper hand. The FBI has warned of Chinese efforts to insert malicious software code into computer networks, targeting critical infrastructure including the electricity grid and water supply.
As tensions rachet higher, temperatures keep climbing, continuously breaking new records. The erosion of living standards from climate change is self-evident. Home insurers have been pulling back coverage from the most fire- and flood-prone areas, with global warming making extreme weather events more severe. The chief executive of Swiss Re, Christian Mumenthaler, has rightly emphasised that rising insurance premiums are a form of carbon price on consumers: “This is the first time we actually bring a climate change bill back to the consumer”.
This could lead to further political backlashes. Far-right parties are hoping to capitalise on farmers’ discontent in the upcoming elections to the European Parliament in June. Companies such as Siemens Energy and BASF are being enticed by lucrative tax incentives in the US, adding to fears of German ‘de-industrialisation’. According to analysis by the CRFB, “energy-related provisions from the Inflation Reduction Act (IRA) will cost almost $870 billion through 2031, more than double the original $400 billion estimate”.
The cost of climate change is rising, as evidenced by higher insurance premiums, adding to inflationary pressures. Capital investment in the green energy transition needs to be accelerated. This ramp up in capex – alongside higher AI investment, and the associated jump in energy usage – should continue to keep real interest rates elevated. The term premia will rise.
