Economics and environment make for a heady cocktail giving both consumers and governments a deadly hangover. Perhaps the single most oft-repeated word uttered by economists, bankers, and policymakers lately is inflation. And climate change is fast becoming one of the crucial factors contributing to it.
According to a UN report of the Inter-governmental Panel on Climate Change (IPCC), 2021 impending heat extremes, due to global warming, will cause longer, intense, and more frequent heat waves, floods, and droughts, severely affecting the economy. Simply put, crop losses and shortages lead to higher prices for whatever is left.
In recent times, record-breaking heat waves, floods, and thunderstorms have surged through the globe resulting in immeasurable losses worldwide. The mercury has soared to unimaginable depths across borders causing sweltering heat spells in the UK, parts of Europe, India, Pakistan, and Canada. Moreover, flash floods have engulfed parts of Western Europe and China, leaving thousands stranded in Germany, Belgium, and Italy. If global emissions continue to rise, these extreme weather events would be only a mere slice of what's to come.
Effects of climate change on economies
Climate and environment have a major influence on the world economy. One cannot lastingly address one, without addressing the other. According to the Swiss Re Institute, the largest impact of climate change is that it could wipe off about 14% of the world’s GDP if global temperatures rise by 2.6 Degree Celcius. The report forecasts South Asia will be the epicenter of global warming, where developing countries like Malaysia, Thailand, and India would be the most severely impacted.
Furthermore, the change in precipitation patterns in the Indian subcontinent will bring forth extreme weather, in the form of erratic rains leading to floods - or the lack of it, resulting in droughts. On average every year, India loses about 1% of its GDP, about Rs. 1805 crore due to floods, coupled with the displacement of thousands and damages to crops, property, and infrastructure increasing the fiscal burden on the goverment and state activities, says the World Meteorological Organization and National Disaster Management Authority.
Then there’s also the problem of heatwaves, which according to scientists in the World Weather Attribution Group, are 30 times more likely to occur in India due to climate change. In one of the warmest summers ever experienced recently, India incurred monumental losses in public health, agriculture, and industry, adversely affecting the economy.
Therefore, there is a clear pattern between extreme weather events and their ultimate impact on the economy. Perhaps, the most striking impact of the crisis is the inflationary trend it has created. In India, climate change is altering weather patterns, which is impacting about 55 % of the country’s inflation basket directly, say HSBC economists.
The triumvirate of climateflation, fossilflation and greenflation
The Russian invasion has pushed the world into inflation levels unseen since 1981. Three distinct but interrelated phenomena are driving this climate change-related inflation, says Isabel Schnabel of the European Central Bank in a report, released this March. These phenomena have been described as climateflation, fossilflation and greenflation.
Climateflation refers to the impact of extreme weather events on supply chain disruptions of ecosystem services-dependent sectors such as agriculture, forestry, energy, and tourism. It results in economic losses in climate-exposed sectors and upward pressure on prices of soft commodities, says an ECB paper. “Invariably, it’s the high cost of oil and fossil fuels in general that drive big fluctuations and overall inflation,” says Mark Zandi of Moody’s Analytics. The second structure driving inflation is fossilflation - which is the upward pressure on the prices of fossil fuels due to a disorderly transition toward greener energies. On the other hand, greenflation has more subtle implications. It refers to the inflation caused by increased capital investment in the transition towards green energy and low-carbon technologies. Most green technologies, extensively require some metals like cobalt, lithium, and copper. The imbalance between, rising demand and constrained supply, is why the prices of many critical commodities are rising immeasurably.
What does resultant food inflation mean for India
India’s headline inflation typically follows trends in food inflation, as food occupies a 39% share of the average consumer's basket. The recent rise in food inflation in India stems from both domestic (heat extremes) and global factors (conflicts). According to a report by Crisil, CPI inflation is set to be 6.8% and food inflation at 7% respectively for the current fiscal. ’As food inflation started picking up in 2021, CPI inflation rose from 4.3 to 7%, and thus food has become one of the top contributors to CPI inflation.
Measures to solve for it
It is imperative for the Reserve Bank of India (RBI) to take heed of the increasing role of climate change, in influencing food prices while forecasting inflation. For now, the RBI has raised the policy repo rate by 90 basis points to temper inflation and anchor expectations. Subsidies on agricultural inputs, cutting import duties, and restricting exports (wheat) by the government, can also ease pressure on prices. A healthy, distributed monsoon, too can help combat food inflation to a degree.
Central Banks need to get into the fight along with climate scientists to reduce the impact of climate change on inflation. In this fight, small behavioral changes like carpooling, teleworking, and conserving power, and big ones like collectively improving food security, reducing dependence on fossil fuels, and investments in recycling facilities will go a long way, as the clock ticks faster.
The writer, a Gold Award winner in the Queen's Commonwealth Essay Competition 2021, studies in Class 12 . He is a fotball enthusiast, an occasional climate blogger and closely tracks issues around climate change.
The writer, a Gold Award winner in the Queen's Commonwealth Essay Competition 2021, is a football enthusiast, an occasional blogger and closely tracks issues around climate change.
