Energy costs have skyrocketed as economies reopened, putting pressure on households around the world as petrol, heating and electricity consume more of people’s pocket money.
These pressures on the cost of living are unlikely to ease anytime soon, and energy prices could rise after Russia invades Ukraine. However, this military escalation is not the main reason why energy prices are so high anyway. In a way, one could argue that the energy shortage gave Russia some confidence to harry the West in its grievances about NATO and its closest neighbors’ foreign policy. The EU is so dependent on Russian energy that supporting sanctions on Russian oil and gas means it would face real risks of blackouts or power rationing across the continent.
Going green doesn’t come cheap
The root cause of rising energy prices, I believe, is the shift to greener energy. Don’t take this to mean that I’m a climate change denier or that I don’t think we need to decarbonize our energy sources! It’s incredibly important, and we’re investing heavily through our multi-asset funds to help. However, it has always been very expensive to radically change our entire energy infrastructure. And unfortunately, I believe government policies around the world have pushed those costs even higher. Especially in Europe, where huge amounts of nuclear power have been quickly phased out of the system at a time when renewables aren’t quite ready to fill the gap. At the same time, it has become more expensive to find, pump and burn oil and gas due to higher emissions taxes and higher yields demanded by bondholders and shareholders in resource companies (which means higher costs for companies).
It’s all about increasing the cost of high-carbon energy and activity, of course! By doing this, you encourage companies to develop cleaner technologies and customers to use them. But when the cleaner alternatives don’t exist – or aren’t able to meet all of the energy needs – you get what we’re seeing: an increase in overall energy costs. And that it harms living standards and economic growth because energy is at the heart of virtually everything we do, consume and create.
High energy prices are effectively an excise tax, a drain on household and business spare cash. This pressure will attract political attention. For many years, moving away from fossil fuels was a narrative of “we have to do this now”. We’re entering an era where the narrative could change to “How are we going to pay for this?”.
It is crucial that policymakers chart a sensible course that ensures there is no backlash against clean energy because most people cannot afford the higher costs.
David Coombs, Head of Multi-Asset Investing, Rathbones
David Coombs will be a panelist at The Scotsman’s free annual investment conference on Tuesday 29th March. In association with Rathbones and Franklin Templeton Register for your free ticket at www.scotsmanconferences.co.uk
https://www.scotsman.com/news/opinion/columnists/backlash-fear-on-going-green-david-coombs-3615681 Fear of backlash when it comes to going green – David Coombs