Why Inflation is Reducing the Green Premium


May 29, 2023

Entering the Economic Golden Age of Sustainable Products & Services. An environment of Volatility, Uncertainty, Complexity, and Ambiguity (VUCA) is continuing in 2023 for businesses, citizens and the public sector. Just as 2020, 2021 and 2022 required humanity-wide changes in attitudes and behaviours, the megatrends in economic resilience, ecological health, and individual well-being are busting out of their traditional silos. While this can appear daunting, one of the beneficiaries of these conditions is the diminishing of the Green Premium.

What Is The Green Premium?

I first heard of the Green Premium in early 2021 while reading Bill Gates’ book ‘How To Avoid A Climate Disaster: The Solutions We Have and the Breakthroughs We Need’. In straightforward economic terms that make sense of a complex situation for corporations, governments and consumers alike, the Green Premium:

“Is the additional cost of choosing a clean technology over one that emits more greenhouse gases” - Breakthrough Energy

It’s a concept we can use to evaluate the fundamentals of all products and services committed to net-zero operations across their manufacturing processes, supply chains, distribution channels and product end-of-life (EOL) cycles. As Gates says, “Ultimately, we need that premium to be so low that everyone everywhere can choose the clean alternative. It’s crucial to understand what getting there will cost.”

How do we reduce the Green Premium?

There are specific conditions where a reduction in the Green Premium occurs as the inflation rate remains high. If the Green Premium is the difference in price between sustainably-made products & services (Product A) and conventional market offerings (Product B), then so long as the cost of Product B increases at a faster rate than Product A, a reduction in the Green Premium occurs.

The alignment of these offerings’ economic and ecological benefits drives a higher adoption rate among customers as the pricing gap of these products shrinks, which in turn expands the customer base for sustainable solutions globally.

These conditions are:

  • Increased customer demand generates higher revenues, enabling further investment and decreasing the cost of production, due to economies of scale 
  • Using renewable energy sources to significantly reduce the cost of production cycle
  • Government policies to further reduce the cost of production, making sustainable products more affordable through the introduction of subsidies and incentives
  • Innovation and technological advancements to continue the 2022 climate tech investment trend $70bn globally
  • Supply chain evaluations ensuring vendors and suppliers are environmentally third-party-certified to reduce waste, improve productivity, and reputational protection

So what does this mean for my business? 

But even now, as we see the Green Premium come into line with the prices of other products, the market for these goods is becoming increasingly competitive. How you equip your audience with the tools to communicate your USP and communicate its value will be paramount to maximising your opportunity to increase both your revenue and impact.

Need some help? Reach out to the Compass team today at hello@compass-studio.com

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