Inflation and Climate Change

Fuel ques, gas ques, and the food crisis were all terms that started trending with the dawn of 2022. Sri Lanka hit an all-time lowest as we began to face the consequences of the worst economic crisis. Much of the inflationary focus in the media has been on energy, with oil and gas price hikes. These topics are also relevant in the debate on combating climate change. Hence the Climate Fact Checks team explored the relationship between the recent inflation and Climate Change.

What is Inflation?

Inflation is an economic phrase used in the gradual loss of purchasing power of money, reflected in a broad rise in prices for goods and services in a given period. Or in another way, the number of goods and services you can buy for a specific amount of money will decrease during inflation.

Inflation is measured by the Consumer Price Index (CIP) and is generally expressed as a percentage change from a reference period. Inflation is a regular aspect of a growing economy, but too much inflation can cause economic instability and negatively affect purchasing power. In a healthy economy, the annual inflation should be within 0 to 2%. Otherwise, there can be an economic crisis. Inflation rates vary worldwide and can be influenced by monetary policy, supply and demand, and geopolitical events.

There are two leading causes of inflation.

1. Demand-pull – With the higher consummation of goods and services. With the higher demand, supply may be harder to meet the demand. With this, the price of goods or services increases and causes inflation.

2. Cost-push – When the prices of materials and services for a product rise for any reason, the final product may affect them. The producer should be covering his expenses as well as he should have a profit. With that also, the price of the goods and services may increase.

The world, and especially Sri Lanka, was hit hard by inflation. Locals are currently suffering due to the severe impacts of the economic crisis. But is inflation related to climate change as well? This is an overview of the effect of inflation on climate change and how we can control it.

The present situation of inflation

Inflation hit the economy in most countries in the world after the Covid 19 pandemic. For more details,here Archived

The Russian invasion of Ukraine has continued to cause global supply chain disruption. As a result, the price level of many essential commodities, such as fuel and food, has increased, resulting in a global recession.

As a country, Sri Lanka is in the worst situation. With the economic crisis, inflation has leveled up.

There is no doubt that inflation has changed the human lifestyle. But today, we focus on how it affects climate change.

Inflation in a world with Climate Changes

Inflation has an indirect effect on climate change. There is a theory that climate change is a secret driver of inflation. Yet this point should have been given more attention in the past.

Higher inflation rates can lead to increased energy and resource consumption. Inflation increases production costs, which drives businesses to use more energy and resources to maintain profitability. And also increases consumer prices, leading to higher demand for goods and services, resulting in increased energy and resource use in production and transportation. In addition, with higher inflation, consumers will likely have more disposable income, increasing demand for goods and services, and rising energy and resource consumption.

With energy and resource consumption increasing, greenhouse gas emissions become higher. This contributes positively to global climate change.

Additionally, inflation can affect governments spending on environmental protection and renewable energy initiatives. Without well-maintained rules, regulations, programs, and policies, the country’s environment will be in danger and become more vulnerable to the impacts of climate change.

The higher demand and the struggle to procure food are common characteristics in an economy with inflation. With this matter, people are trying to make more and more food materials for their usage and the market. This is a good trend, but it can affect badly sometimes on a country’s climate.

When farming and cultivation expand, the forest cover is decreased. For some cultivation methods like chena cultivation, people remove and burn the forests and cultivate vegetables and other edible greeneries. Removing forest cover has a negative effect on climate change.

On the other hand, inflation can also drive up the cost of fossil fuels, making renewable energy sources more competitive and encouraging a shift towards a low-carbon country. For example, Russia and Ukraine’s present situation has increased fuel costs as Russia has a prominent role in fuel distribution worldwide. With this, people have adapted to the problem with different tactics.

Some countries have deducted their fuel usage by promoting public transportation and managing the country’s fuel consumption. Priority has been given to renewable energy sources instead of fossil fuels. Moreover, due to price instability, government incentives, technological advancement, increased energy independence, and climate change concerns are given priority.

This trend carries the best, most long-lasting, and most beneficial results on climate change and the country’s economy. A country suffering from inflation can be optimistic due to the positive changes that await.

But for a developing country, there needs to be more financial support to conduct these projects, while inflation is a more significant focus area to combat.

How to combat Climate Change with an unstable economy?

Encouraging investments in renewable energy sources such as wind and hydropower can reduce fossil fuel dependency and mitigate climate change.

The government has to have a plan to manage the environment and climate change. Therefore, funds should also be directed to conserve the environment and mitigate climate change.  For example, Sri Lanka has published a National Environmental Action Plan 2022, If successful, will be a symbol of victory in Sri Lankan history of environmental conservation. Read more about this in our article Diving into the National Environmental Action Plan (NEAP) focused on Climate Action.

Governments can price carbon emissions to encourage businesses and individuals to reduce their carbon footprint.

Concepts like ‘from the garden to the plate’ should be encouraged in farming and cultivation. This means cultivating in own garden area for family consumption is better for the environment and health. It will also minimize forest destruction and the demand for cultivated food items.

Though inflation has several adverse outcomes on climate change, if the government and the public put in an effort, the situation could be controlled. With public support and good management without corruption, inflation may be the silver lining to the dark cloud hovering over Sri Lanka.

( With Inputs from Mihiri Saparamadu)