Increasing costs: The impact of climate change on output will be large

There is a need to comprehend the macroeconomic ramifications of climate change fully. A report published by the Asian Development Bank (ADB) attempts to estimate the impact of climate change on the gross domestic product (GDP) of countries in the Asia-Pacific region under a high-end greenhouse gas emission scenario. It concludes that India could experience a 24.7 per cent loss in its GDP by 2070, thereby remaining one of the worst-affected countries in the region. The negative economic impact is expected to occur via channels like coastal inundation, lower labour productivity, and lower natural resource productivity, with relative impact concentrated in areas populated by poorer and vulnerable communities. The United Nations Environment Programme’s “Emissions Gap Report 2023” shows the world mean temperature is set to rise by around 3 degrees Celsius above pre-industrial levels by the end of the century even if countries fully implement their nationally determined contributions (NDCs). The drastic rise in temperatures will naturally lead to precipitous declines in output, capital accumulation, and consumption over the long term.

 

At the same time, the ADB report has lauded India’s efforts on climate-change adaptation and mitigation. India, for instance, has achieved two of its NDC targets ahead of time. These include reducing the emission intensity of its GDP by 33 per cent by 2030 from the 2005 level and achieving more than 40 per cent cumulative electric power installed capacity from energy sources based on non-fossil fuels by 2030. The report also noted the country’s noteworthy progress in fossil-fuel subsidy reforms and deployment of digital technologies to enhance climate-adaptation efforts. In this context, climate finance remains essential for transitioning to a low-carbon economy. Developed countries were able to mobilise $115.9 billion for the developing countries, exceeding the annual $100 billion goal for the first time in 2022. Estimates, however, suggest the $100 billion target is insufficient. A recent analysis by the Climate Policy Initiative shows annual climate finance has more than doubled between 2018 and 2022. Yet, a substantial increase is required to reach the $7.4 trillion needed each year through 2030 to limit warming to 1.5 degrees Celsius.

 

Notably, 89 per cent of the climate finance in emerging market and developing economies is dedicated towards mitigation, with the bulk going to energy systems, followed by the transport sector, and the buildings and infrastructure sector. In terms of energy transition, the ADB report finds India has one of the lowest manufacturing and installation costs of solar photovoltaic cells, generating electricity at $0.04 per kilowatt-hour (kWh). A similar trend can be observed for onshore wind turbines. Over 90 per cent of solar projects in the country achieved investment-grade ratings by 2020, a significant improvement from 2012, when all solar projects were rated “non-investment grade”. The bulk of the climate finance comes from the public sector and is mobilised in the form of debt instruments, which are mostly non-concessional and add to the debt pressures of developing countries. There is thus a need to increase private-sector participation by strengthening capital markets. It is equally important to source finance domestically, since servicing debt in foreign currencies only increases exposure to exchange-rate fluctuations. In the longer term, rapid decarbonisation remains the only way forward.