Economics of Climate Change

• 26 Oct 2021

Why in News

The COP26 climate talks are going to take place in Glasgow. Given the magnitude of climate change phenomena occurring all over the world, the upcoming climate deal negotiation is crucial to cap global warming at the 1.5-2 degrees Celsius upper limit set out in the 2015 Paris Agreement.

• In this context, it is necessary to analyze the impact of climate change on economic livelihoods in the world over and the future stability of the global financial system.

Key Points

• Climate Change Cost: Although there is disagreement on the magnitude, several economists are certain about the possible impact of global warming on global output.
  
  • According to one International Monetary Fund (IMF) estimate, unchecked global warming would reduce 7% of world output by 2100.
  • The Network for Greening the Financial System (NFGS) group of world central banks puts it even higher at 13%.
• Most Vulnerable Area: It is unanimously accepted that the developing world will be the worst affected area by climate change.
  
  • Presently, much of the world’s poor live in the tropical or low-lying regions already suffering climate change fall-out like droughts or rising sea levels.
  • Moreover their countries rarely have the resources to mitigate such damage.
• Impact on Micro-Level: Climate change will drive up to 132 million more people into extreme poverty by 2030, a World Bank paper last year concluded.
  
  • Factors included lost farming income; lower outdoor labour productivity; rising food prices; increased disease; and economic losses from extreme weather.
• Analysing Net Zero Emission Scenario: ‘Net zero emissions’ refers to achieving an overall balance between greenhouse gas emissions produced and greenhouse gas emissions taken out of the atmosphere.
  
  • However, there are several economic repercussions owing to Net Zero emissions.
  • A report by think tank Carbon Tracker estimated that over USD 1 trillion of business-as-usual investment by the oil and gas sector would no longer be viable in a genuinely low-carbon world.
  • Moreover, the IMF has called for the end of all fossil fuel subsidies – which it calculates at $5 trillion annually if defined to include undercharging for supply, environmental and health costs.
  • This may lead to an unemployment crisis of mass level.
• Below Par Carbon Pricing: Tax or permit schemes that try to price in the damage done by emissions create incentives to go green.
  
  • However, so far only a fifth of global carbon emissions are covered by such programmes, pricing carbon on average at a mere USD 3 a tonne.
  • This is well below the USD 75/tonne the IMF says is needed to cap global warming at well below 2°C.
• Risk of Inflation: Anything which factors in the polluting cost of fossil fuels is likely to lead to price rises in some sectors.
• Failure of Green Decoupling: Sustainable growth implies that economic activity can grow as needed without adding yet more emissions.
  
  • However, this has failed to manifest uptil now.
  • Presently, higher rates of economic growth are achieved but it is accompanied by gains in emissions or achieved by shifting dirty production from one national territory to another.
• Inadequate Green Finance: At a global scale, the rich countries which since their industrial revolutions have generated the bulk of emissions have promised to help developing countries transition via USD 100 billion of annual transfers – a promise so far not fulfilled.

Way Forward

• Covering Up Economic Risk of Net Zero Emissions: The global financial system needs to be insulated against both the physical risks of climate change itself and the upheavals likely to happen during a transition to net zero.
  • Central banks and national treasuries should form a combined strategy to balance economic growth with sustainable development.
  • A vital step should be explicitly including policies for climate mitigation in the government budget, along with energy, roads, health and education.
• Switching to Hydrogen Economy: Power generation by green hydrogen will be a viable solution to achieve the target of ‘net-zero’ emission to remain under 1.5° C.
  
  • It will also be a leap forward in minimising the dependence on conventional fossil fuels.
• Mobilising Climate Finance: There is also a need to launch a major campaign to mobilise climate finance and focus should be given on energy efficiency, use of biofuels, carbon sequestration, carbon pricing.

Source: IE