By Julie Gordon

OTTAWA (Reuters). – Hydrogen-cell trucks, solar-powered homes, and electric tractors: Canada is ambitious in its net zero ambitions. However, it must invest trillions to get there. This will fuel higher inflation for many years ahead, analysts said.

Canadian business investment fell over the last decade. The economy experienced an excessive supply which led to lower inflation and structurally lower interest rates.

However, this trend will reverse according to David Dodge (an economist and ex-Gouverneur of the Bank of Canada), as consumers spend more during the “green transition”.

Dodge stated in an interview to Reuters that “We have significant investment efforts to address climate change” and said, “We convert everywhere from fossil fuel use.”

The increased spending will result in a tendency for prices to be more up- and less downward pressure, stated Dodge who was Canada’s chief banker from 2001 to 2008.

As the global economy transitions to cleaner sources of energy, experts around the world are already warning against greenflation. This will lead to higher energy prices and increased consumer costs. Price increases will be fueled by increased business investment and increased demand for higher-skilled workers.

However, higher inflation could lead to higher interest rates. This is a serious risk for Canada’s high-indebted households. They are burdened by C$2.5 trillion ($2 Trillion) of debt and more than Canada’s annual production.

Canadian inflation stands at 4.7%. The Bank of Canada has maintained a record-low 0.25% key interest rate since March 2020. This is an 18 year high. Although the central bank indicated that it may raise its interest rate as early as April, money markets do not rule out an immediate increase.

HUGE BILL

Canada, fourth-largest oil-producing country in the world, has committed to cutting emissions 40-45% below 2005 levels, and to reaching net-zero emission by 2050.

According to The Royal Bank of Canada, it will take C$2 trillion for three decades to reach the net-zero goal. Ian Lee, an Ottawa professor at Carleton University’s Sprott School of Business thinks that it may cost even more because of the widespread usage of oil as a fuel for heating or industrial purposes.

Lee explained, “We’re talking to rebuilding the whole energy-based economy from oil, gas, to electric and so it’s going be at an unprecedented scale.”

Lee said, “I don’t doubt that it will inflationary.” You can do any thing at this scale and it will be inflationary.

Official data shows that roughly 54% Canadian homes heat with fossil fuels. The majority of these are natural gas and 40% use electric heat. Canada generates 18% of its electricity using fossil fuels, mostly coal and natural gas.

Renewable electricity will be the preferred fuel for homes, schools, business, and industrial buildings. All vehicles and equipment used in transport, such as cars and trucks, will have to switch to electric.

A major expansion of power grid will be required to meet the increased demand.

Some economists disagree with this assertion, noting that the inflation spike will likely be permanent. They also point out how quickly energy prices can drop once renewables become available.

“Germany basically subventioned everybody to install solar panels on their roofs. This had a significant negative impact on inflation as it caused power prices to drop,” Stephen Brown (senior Canada economist at Capital Economics) said.

Toni Gravelle from Bank of Canada, Deputy Governor of Climate Change said in November that while the long-term climate-related restructuring might be difficult to swallow in the short term.

But in the long-term, there are a lot of jobs and an economy that is much more flexible. He said that it was a win-win situation at the end.

($1 = 1.2457 Canadian dollars)