About Greenflation

Just recently, our news feed & timeline has been abuzz with the “greenflation” term in the vice-presidential debate. Is it the first time for you to hear that phrase? What is greenflation? What is the difference between greenflation and inflation? Is it dangerous for our economy? Is it important and may affecting our daily life? The answers to these questions will be answered by reading this article. Stay tune!

During the debate, one of the vice president candidates, Gibran, asked the other candidate, Prof. Mahfud, regarding greenflation. The question was more or less like this: “How to overcome greenflation?”. Not satisfied with Prof. Mahfud’s answer, then Gibran took an example from the yellow vests protests in France few years ago.

There are two keywords here: greenflation/ green inflation and yellow vest. What is the relation between these keywords? Okay, to answer that, I’ll talk first about green economy. Why? As we all know, there are so many social movements regarding global warming. We can feel it ourselves that in few months back, at least in Jakarta, it’s getting hotter than usual. Whereas, we already at the rainy/wet season. So, the global warming is real. What can we do about it? Before I talk further about that, I would like to say that green inflation is something that is relatively new, and still, there are so many people that don’t understand about it yet. Even if there are people who already aware of it, I bet those are the Germans. Why? Please check the screenshot from the news below:

Even if you check the Oxford dictionary, I’m not sure that you can find the terms of green inflation. Hence, it is normal if this phrase is not common yet in our society. Moreover, before we dig deeper about greenflation, let’s talk about the green energy first. Due to global warming, el-nino, and many more, our earth has experiencing several disasters such as rising temperature, typhoon, flood, etc. In the end, many people might think, how to save our earth from all of this? Thus, came the green energy idea. There are countries who then build the solar panel, wind power plant, water power plant, geothermal energy, etc. In short, the green economy is an economy that does not have a negative/ at least has minimum impact on our environment. For example: let’s change from plastic straw to paper straw, let’s create a vehicle that is using electricity, let’s produce some clothes that environmentally friendly, and so on. That is what we called the green economy (including circular economy).

From there, we can finally talk about greenflation. Greenflation is something that is quite harmful for our economy. Even an uncontrollable regular inflation is dangerous. As we all know, inflation is a condition where the price of goods & services is keep increasing from time to time or in another words, a condition where our purchasing power is keep decreasing. For instance, when I was in middle school, the school tuition fee was around IDR 150-200k/month. Nowadays, it is already increase to IDR 500-600k/month. In the end, if the inflation is too high, it will definitely destroy our economy (hello, Zimbabwe).

Okay, let’s go back to greenflation. Greenflation is an intentional inflation to create an environmentally friendly condition. For illustration, let’s say the normal price of gasoline per liter in Indonesia is IDR 10k. However, in Europe, the gasoline price is added by carbon tax amounting to IDR 2k. Hence, the price of petrol per liter in Europe is IDR 12k. Is it okay? Well, it is generally fine since the additional IDR 2k can be used to plant some trees, build solar/wind/water power plant, etc. It sounds cool, isn’t it? But the fact is, reflecting from what happened in France, when the government increases the gasoline price (by adding the carbon tax), with a purpose to reduce pollution, the result was demonstration/protests everywhere. This is what we called by the yellow vests protests. Why were they protesting? In summary, because they feel that their purchasing power is getting lower and lower. They run out of money just to buy gasoline. Hence, these conditions are creating greenflation.

Currently, the carbon tax term is becoming more popular in Indonesia. The government may have some plans to also apply carbon tax in Indonesia. In my opinion, the government really needs to think super carefully about it. Why? Let’s imagine if there is a textile factory that has a bank loan. The cost of goods sold (COGS) for a t-shirt is IDR 10k. Turns out, there is new policy from the government that the textile factory has to use green energy as their energy source. Previously, the factory utilized coal energy for its electricity power. Now, due to the new policy, they are planning to use solar panel instead. In the end, what will happen? Yes, the COGS will increase. Why? Because the price of solar panel is more expensive than the price of coal. The increase in the COGS will be followed by the increase in retail price for end consumers. If the price increase, then so is the inflation rate. Since the inflation is originating from the carbon tax/ green energy application, then we called it by greenflation. Can you see the connection among all of these factors now? This is why I think that the government really needs to be super careful before applying carbon tax policy. It will also make our industry becoming not competitive globally. You know that in Germany, they used to buy energy for quite a cheap price from Russia. Be it natural gas, petrol, etc. Nowadays, due to the embargo & war between Ukraine and Russia, the cost of the energy in Europe has been rising sharply.

You can ask your German friend just to confirm: how much do they pay for electricity per month this winter for instance. Some European countries are even re-activating their coal power plants. Since the energy cost is rising, plus the carbon tax factor, and yet, the industry in Europe still needs to be competitive in terms of production cost. Can you imagine it? No wonder that there are so many factories in Europe ceased its operation. This is the harsh truth.

The factories there are no longer able to bear the rising energy cost, and we don’t want this to happen in Indonesia, definitely. Few days ago, there were news that some factories in Indonesia move its operations to Vietnam. We can talk about this in different article. The point is: green economy is great. Green energy is also great. But, be careful with greenflation. If we wrongly apply it, it may cause in in-competitiveness for our local industries (UMKM) which might lead to mass layoff, and finally many factories may cease their operation & move to the neighboring countries, etc.?

The reality is, turns out Europe is not that “green”. Some of European countries are reviving their coal power plants – the dirty energy yet cheap at the same time, just to lower their energy cost. In the end, not all the western propaganda must be adopted 100% here. We have to be wise in taking any action towards it. Whether it will benefit Indonesia or not for example.

Last but not least, you also need to be wise before electing our next president in the election because the challenges for our country in the next 10 years won’t be easy.

By reading this article, I hope you get a grasp on what greenflation really is.

Happy Investing!