ECONOMICS OF CLIMATE CHANGE

1. Context 

2. Global Climate Risk Index 

• The Global Climate Risk Index 2021 ranked India seventh in the list of most affected countries in terms of exposure and vulnerability to climate risk events.
• In its latest report on currency and finance, the RBI (India's central bank) has a chapter dedicated to answering many of these questions and explaining the macroeconomic effects of climate change in India.

3. The evidence of climate change

• The most obvious signs of climate change are anomalies in temperature and precipitation (rain, hail, snow etc.)
• The average annual temperature in India. While annual average the temperature in India has been increasing gradually, the rise has been significantly sharper during the last vicennial (twenty years) than during any other 20-year time interval since 1901 finds the RBI paper.

4. RBI research on annual rainfall

• Similarly, the southwest monsoon, too, has been becoming more erratic.
• According to the RBI research, Notably, while the average annual rainfall at the all-India level during the last vicennial (2000-2020) saw a rise over that during 1960-1999, over a longer time horizon since 1901, annual average rainfall in India has gradually declined.
• Moreover, evidence suggests that while dry spells have become more frequent during the last several years, intense wet spells have also increased.
• Research about natural disasters since 1975 has shown that India is relatively more exposed to floods and storms (i.e. cyclones and hailstorms) than droughts and heatwaves. 
• Such incidences pose significant risks to agricultural production and food price volatility.

1. By looking at India's geographical attributes
2. By looking at the structure of India's economy.

• India's diverse topography is not only exposed to different temperature and precipitation patterns but also makes it vulnerable to extreme weather events posing wide-ranging spatial and temporal implications for the economy.
• India's economic structure has undergone a considerable change since Independence.
• As such, the bulk of the economic activity now happens in the services sector as against the agriculture and allied sectors.
• This has significant implications for carbon emissions because services are "globally considered to be emission-light with the relatively lower energy intensity of output.
• The sectoral break-up shows that metal industries, electricity and transport are all highlighted are the highest emission-intensive sectors, together accounting for around 9 per cent of India's total GVA (gross value added) in 2018-19.
• The sectoral composition of the Indian economy helps reduce its carbon emissions.
• However, notwithstanding this, fossil fuels have an overwhelmingly large share in India's primary energy consumption and this fact needs to change.

5. The macroeconomic impact of climate change on India

• Climate change can adversely impact both the supply side (read the productive potential) as well as the demand side.
• It can stoke inflation, reduce economic output, trigger uncertainty and change consumer behaviour.
• Over the years, there have been several predictions and assessments made about the impact of climate change on India's economy.

6. Categories of climate change 

• Typically the risks from climate change are categorised in two main ways.
• One is the physical risks and these include chronic issues (such as a gradual and sustained change in temperature and precipitation) as well as acute events such as extreme weather occurrences).
• The second category of risks is called transition risks; simply put, these refer to economy-wide changes arising from the transition towards a low-carbon economy. This is best encapsulated by a paradox called "success is failure".
• If the shift towards becoming a low-carbon economy is too rapid, it could materially damage a country's financial stability.

7. Policy insights

• The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) have created an analytical framework called the National Institute Global Econometric Model (NIGEM) "to produce policy insights".
• In this model, the researchers looked at how GDP growth rate and inflation would be affected under six different policy stances when compared to the baseline. 
• However, global scenarios of "current policies" and "nationally determined contributions (or NDCs) have the highest negative impact on output, whereas rapidly moving towards Net Zero by 2050 will contain the hit to GDP.
• The impact on inflation. Here the story is slightly more complicated. Moving towards net zero by 2050 will spike inflation far more in the immediate future than continuing on current policies.
• Overall, these trade-offs will become sharper as India tries to achieve the twin goals of achieving net zero emissions by 2070 and becoming an advanced economy by 2047.