Reserve Bank of India on Wednesday released the ‘Currency and Finance’ report, which says delayed climate policy actions could be costlier, in terms of larger output losses and higher inflation. It analysed the macroeconomic impact of some of the key extreme weather events such as floods, cyclones and droughts in the last 10 years i.e. 2012-13 to 2021-22.
Five states along the western coastline i.e. Gujarat, Maharashtra, Goa, Karnataka and Kerala and four states along the eastern coastline i.e. West Bengal, Odisha, Andhra Pradesh and Tamil Nadu together with their eight neighbouring inland states have been considered.
According to the report, India’s diverse topography makes it highly vulnerable to climate risks, manifested in the form of a sustained rise in temperature, erratic monsoon patterns, and rising frequency and intensity of extreme weather events. "India's goal of becoming an advanced economy by 2047 and achieving the net zero target by 2070 would require accelerated efforts in terms of reducing the energy intensity of output as well as improving the energy mix in favour of renewable," the report says.
Scenario analysis suggests that delayed climate policy actions could be costlier, in terms of larger output losses and higher inflation. Sectoral analysis, for risk mitigation, suggests policy interventions to focus on high emission-intensive sectors to minimise trade-off costs. Sectoral implications could include disruptions in cropping cycles and variations in agricultural yield/output.
In the industrial sector, the report says, there could be an increase in operational costs reducing profitability, owing to the imposition of new climate-friendly regulations, reduced utilisation of old stock of capital and diversion of investment towards greener infrastructure/capital/technology coupled with relocation of production processes and activities due to climate-related losses.
Adversities in the services sector could be diverse, such as strains on financial services, due to an increase in insurance claims, as well as disruptions in travel, transportation and business services. Climate events could also have implications for various factors of production. At a broader level, there could be implications for the labour market in terms of labour productivity decline due to climate-related health hazards, and climate migration, i.e., out-migration from areas that are significantly prone to climate risks to lesser affected regions.
Capital could also be impacted due to the physical loss of infrastructure that may depress the return on capital and regulatory charges differentiating between green and other assets. Overall, costs are expected to rise for the economy owing to rehabilitation measures and new investments for mitigation and adaptation, which if funded by the government, could entail additional fiscal costs, according to the report.
"From the perspective of monetary policy, an assessment of climate-related risks – the likely persistence of the impact of the shock, the extent of the impact on target variables and the transmission channels, and future risks – becomes important to insulate the economy from adverse consequences as monetary policy seeks to stabilise the economy after it is hit by unanticipated shocks," the report says.
"From the standpoint of monetary policy, this calls for a careful monitoring and assessment of the visible patterns of climate-related risks and their associated implications for the economy, such that appropriate and timely policy measures may be calibrated," it adds.