Like the disruption caused by the COVID-19 pandemic, this economic environment, and underlying energy pricing shocks, has the potential to accelerate or disrupt the net zero emissions transition depending on the response from governments, regulators and industry. Further, there are now well established connections between energy price shocks, inflationary pressures and different aspects of the climate challenge that need to be accounted for in policy and industry response to current events. These include an over-reliance on fossil fuels, which in turn exposes economies and communities to geopolitical tensions, production issues and international cartel-like behaviour from some producers, among other concerns. At the same time, worsening climate change is projected to create other economic concerns through issues like supply chain disruption and long-term value destruction that may weaken the effect of traditional monetary policy responses to pricing instability.

Given these risks it would be a mistake to unnecessarily delay the energy transition or lock-in higher greenhouse gas emissions in seeking to solve current energy price shocks and rising inflation. At the same time, well-targeted measures that bring together renewable energy, energy efficiency, energy security and decarbonisation goals can make a medium- to long-term contribution to building greater resilience among households, industry and the economy. This would address the inflationary aspects of fossil fuels and avoid accelerating the price volatility than can be expected with worsening climate change. However, policy-makers, industry and regulators will also need to monitor and adjust policy settings for other inflationary pressures that may arise from the economic activity created by the necessary accelerated transition to net zero emissions.

This issues paper details some recent interventions on these topics and highlights areas of policy that will be relevant for addressing current and persistent challenges related to energy markets, climate change, economic policy and inflation.