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How circular thinking could ease inflation

circular money

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Climate issues almost always have been thought of by the financial markets as long-term, but that might just not be true anymore. The sudden success of traditional short-term activist strategies to press corporate boardrooms on climate, the success of SPACs and the trillions of dollars flowing into clean energy and infrastructure right now are a sign that the market’s time horizon on climate issues is moving up.

Perhaps it was a consequence of the pandemic that forced some of the biggest changes in our lifetimes to economies around the globe, and the realization that the impacts of runaway climate change could cost twice as much. Or, this chance to rebuild and reshape the global economy after the pandemic is making investors look much more closely at the longer-term impact of the dollars they spend today.

Circular thinking is the ultimate exercise in long-term thinking and efficiency — a way to mine our past to fund our future.

Either way, sustainability has moved to the short-term part of the conversation. But as much as SPAC debuts and record renewables deployment figures have captivated the market this year, we’re just now starting to look more closely at how we build a more sustainable economy.

Take comments from BlackRock CEO Larry Fink in the Financial Times this week, that moving too fast on climate action could actually be a problem.

Accelerating the race to green the economy would raise the prospect of higher inflation and pose a major policy challenge for many countries, Fink said in remarks at the Deutsche Bank global financial services conference. Citing the example of airlines (biofuels are 50 to 60 percent more expensive than current carbon-based sources), Fink said a mandate to go green quickly would result in higher ticket prices. This would ultimately prove too disruptive for the economy and would not fly politically given the likelihood of ‘displaced jobs and deepening regional inequalities.'

While airline ticket prices are just starting to rise off their pandemic lows, the price increases in the commodity markets from steel to copper and lumber are sparking inflation fears, sparking debate over whether this is just a demand surge for post-pandemic manufacturing or a sign of a commodities supercycle.

Renewable energy technologies such as solar, wind and battery storage have benefited from declining costs over the past decade. As the world scaled up those technologies and got better at producing them, the costs to produce the core technologies that enable renewables have come down 70 percent to 80 percent in a relatively short period of time.

It’s unclear what a lasting sharp increase in commodity prices could do to those cost curves, which are critical to wider adoption. Of course, there’s another option. A battle with inflation could inspire us to think about how we use those materials more efficiently.

Use and reuse

To get to net zero, we probably need to find more creative ways to use and reuse materials (and GreenBiz will dig into the topic more at Circularity 21 next week.) But fundamentally, if it can be salvaged, investing in a source of material we’ve already mined, grown or produced can protect its price from swings in commodity prices.

Electric cars need fewer parts than internal combustion engines but the parts they do use require a much more intense complement of minerals. It’s clear our future green energy goals will be dependent on a different group of minerals and materials that don’t benefit from traditional supply chains, from nickel and manganese to lithium, cobalt and graphite.

This could mean that miners have to change what they are doing, although that would likely cost over $1 trillion in new investment. Even though battery metals or rare earths used in wind turbines are probably a better bet than coal mining, most miners have not been readjusting their mining activities yet to tap this new source of value. Battery minerals make up less than 3 percent of the total revenue of the largest 40 mining companies in 2020, according to a PwC report this week.

You already can see the signs that circular thinking is beginning to take hold, but it requires formalizing and growing sectors of the economy. The European transport sector’s push for used cooking oil as a more sustainable fuel source spurred calls recently for more supervision. And the Biden administration’s electric vehicle plan includes promoting a battery recycling program, which we may need to hold off shortages and as the price of nearly every input into an electric car is going up.

Collectively, we have a long way to go to truly reach a world where we waste less. Even though recycling rates have soared in Europe ahead of its single-use plastic ban next month, the latest research shows only 5 percent of the value of plastic stays in the economy as recycled material.

Circular thinking is the ultimate exercise in long-term thinking and efficiency — a way to mine our past to fund our future. It’s also making its way firmly into the near-term.

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