Rupert Darwall

Has the Bank of England’s net zero obsession fuelled inflation?

(Photo: iStock)

The Bank of England was made independent to take monetary policy away from flighty politicians who are slaves to expediency and fashionable sound bites. Instead, central bankers imbued with objectivity, prudence and, most of all, economic expertise would be in charge. But when it comes to climate change and net zero, the Bank has shown that poor judgment is certainly not exclusive to elected officials.

Only a month ago, Andrew Bailey, Governor of the Bank of England was touting net zero as a growth elixir. ‘The transition to net zero is a major structural change that needs substantial investment and can over quite a prolonged transition period help to raise the potential growth rate of the economy,’ Bailey declared. ‘That is the challenge, and it’s a positive challenge, it seems to me.’ Bailey acknowledged there were ‘headwinds’ on the path to net zero, but these were caused by the disruptive effects of the pandemic, rather than anything inherent in the economics of the energy transition.

A very different perspective was given by Isabel Schnabel, the German member of the European Central Bank’s executive board. Back in January 2022, Schnabel warned that the energy transition could bring about a protracted period of higher energy inflation. ‘The contribution of energy and electricity prices to consumer price inflation could be above – rather than below – its historical norm in the medium term,’ Schnabel warned. She was right. Schnabel’s conclusion – unlike Bailey’s – has proved spot on.

Indeed, Bailey’s recent remarks on net zero could hardly have been more ill-timed. Last week, the wind power fable came crashing down when Siemens Energy, Europe’s second largest wind turbine manufacturer, announced extra costs potentially in excess of €1 billion caused by high failure rates of rotor blades and bearings.

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