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Ecoflation, A New Economic Worry

December 9, 2008

Ecoflation, the rising cost of doing business in a world with climate change, could hit consumers hard in the next 5 to 10 years says a report by World Resources Institute and A.T. Kearney, a global consulting firm.

According to the report, fast-moving consumer goods companies could see earnings fall 13 to 31 percent by 2013, and up to 47 percent by 2018 if they do not take on sustainable environmental practices.

The costs of global warming are not yet being reflected in consumer prices says Andrew Aulisi, of the World Resources Institute.

According to Aulisi, these costs are being incurred by governments and society.

This could quickly change if President-elect Barack Obama pushes for a pricing system on the emission of carbon dioxide.

The move is unlikely to happen before the December 2009 global deadline to create an international climate change pact.

According to Aulisi, rising costs and tightening regulation of emissions is not a bad thing.

“The message we don’t see in this study is that regulation is going to cost … a lot of money,” Aulisi said. “We think the analysis is a catalyst to convince companies to take greater action on these important issues.”

Many companies are already working to cut their emissions, says Daniel Mahler of A.T. Kearney.

Procter & Gamble is already working towards using less plastic.

According to Mahler, the changes may need to spread into the basics of how supply chains are managed.

If a new carbon emissions pricing pact is made, many companies will find the low costs of foreign labor offset by the new cost of carbon emissions, making foreign manufacturing less attractive, Mahler said.

The U.S. could see a shift from centralized manufacturing plants to smaller, dispersed ones.

“That is not a little tactical change,” he said. “It is an infrastructure change that we see companies … addressing much more aggressively than they had been in the past.”

According to Aulisi, major economies are likely to pay for carbon emissions at a price of $50 per ton.

The price is nearly 10 times that of carbon being traded in voluntary U.S. markets. 

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