There is a growing recognition that even if governments are the most influential agency for climate change, central banks and financial sector regulators are going to become the major stakeholders because financial institutions play a key role in intermediation and hence have a more direct role in addressing climate change
Michael Debabrata Patra, Deputy Governor, Reserve Bank of India
In the past, I have dwelled on macroeconomic stability; price stability; exchange rate stability; financial stability – all essentially issues centered around the core competence of conservative central bankers from which we are reluctant to stray.
After all, central banks stand for stability.
I intend to address a theme which threatens to overwhelm all these aspects of stability – the sum of all fears, to borrow the name of a gripping 2002 movie starring Ben Affleck and Morgan Freeman.
It is a theme about which several central banks have expressed reservations about engaging in order to avoid mission creep, while others have expressed inability in view of lacking the instruments to deal with it.
The stark ominous reality is that the climate is striking back. Central banks cannot be immune or inactive any longer.
Climate change is not new. The earth’s temperature has begun rising. In September 2023 it averaged 16.4°C degrees Celsius, 1.75 degrees warmer than the pre-industrial period of 1850-1900 (World Meteorological Organisation (WMO), October 2023). The warming up of the climate can have cataclysmic consequences.
Climate Catastrophes Paralysing Earth
Climate change is manifesting itself at an alarming scale and pace globally, undermining livelihoods, infrastructure, and endangering health, food, energy and water security. Humanity is imperilled and so is the future of the planet.
According to the World Meteorological Organisation (WMO), the period 2015-22 has been the warmest on record. In the Northern hemisphere, this year’s summer has been the hottest on record and the year 2023 is on its way to becoming the hottest ever7. Climatic disasters are occurring more frequently and across the globe.
India faced its hottest February in 2023 since record-keeping began in 19018. In March, large parts of the country experienced hailstorms and torrents of unseasonal rain, leading to extensive damage to standing crops.
According to India’s Centre for Science and Environment (CSE), the country experienced extreme weather events on 314 of 365 days of 2022, which claimed 3,026 lives, affected 1.96 million hectares of crop area and 4,23,249 houses, and killed over 69,899 animals9. In 2023, April witnessed a record-breaking heat wave in India and other parts of Asia.
May was the warmest since 1850. June and July were the hottest on record and August was the driest for India since 190110. In sharp contrast to the world, India experienced among its wettest Septembers in 2023.
This Time is Different
Although temperature increases have been recorded during the course of earth’s history, the current episode of anthropogenic climate change is qualitatively different from the historical experience.
First, changes in the earth’s climate that are underway are largely human-induced, as noted earlier, while the earlier incidences were primarily the result of various natural factors.
Second, the pace of climate change during the current phase is remarkably rapid – it is unfolding over decades whereas earlier occurrences of climate change happened over centuries and millennia.
Third, costs involved in the policy responses for adaptation to and mitigation of climate change related challenges are unprecedented.
Fourth, the current experience with climate change is truly global in nature with accentuated regional implications.
Climate scientists recognise three anthropogenic (or human-induced) drivers of climate change: green house gas (GHG) emissions; aerosols; and land use and land cover. Estimates show that the contribution of human-caused global surface temperature increase is 1.07°C during 2010-2019 relative to 1850-1900 levels – almost the entire increase in global temperature during this period11.
The rise in extreme weather events has also increased the economic costs associated with such events.
Climate Change: Global Actions
Climate change has moved to the centre stage of the global public policy debate today. While the growing recognition of the adverse effects of climate change has led to some recent actions that are weakening the correlation between carbon emissions and GDP growth globally, an absolute decoupling is yet to happen.
Climate change can affect price stability through supply shocks such as food and energy shortages and through a decline in productive capacity. Demand shocks can arise due to the loss of wealth of firms and households on account of frequent natural disasters.
Physical and transition risks can affect the balance sheets of financial institutions and banks, limiting the flow of credit to the real economy. These destructive forces interact with each other to form vicious feedback loops.
Hence, almost all countries have committed to timelines for the transition to net zero emissions, with the majority committing to achieve this target by 2050.
While 23 per cent of the countries have made the target a legal obligation, 18 per cent have proposed to make it into a legal obligation and the remaining 59 per cent have made their pledges in official policy documents.
All these countries together account for around 73 per cent of global CO2 emissions (59 countries have proposed actions or are in discussions).
Climate Change and India
The Indian sub-continent has a diverse topography, ranging from the snowclad Himalayas in the north (the youngest and tallest mountains in the world), fertile plains, the world’s largest delta in the east, the Thar desert in the north-west and a long coastline of more than 7500 kilometres. Consequently, the country is intrinsically exposed to different temperature and precipitation patterns. More recently, however, India is becoming vulnerable to extreme weather events.
Coastal cities, which are among the most densely populated regions of the world, are becoming increasingly prone to cyclones, flooding, and salinisation of farmlands and freshwater supplies.
The Indian sub-continent receives about 75 per cent of its annual rainfall during the southwest monsoon (SWM) season from June to September. This rainfall is crucial for the summer cropping season. Over time, the southwest monsoon (SWM) pattern has subtly changed, with a rise in average annual rainfall. At the same time, dry periods have become more common, while intense wet spells have also increased. Overall, risks to agricultural production and food price volatility have both increased significantly.
The past decade (2011-2021) has been the warmest on record, with 11 of the 15 hottest years in India since 1901 – the years 2022 and 2021 are ranked as the fifth and sixth warmest years, respectively, since 1901(India Meteorological Department). Extreme weather events, including unseasonal rainfall, cyclones and heatwaves, have become more frequent.
India’s Energy Requirements
The sectoral composition of India’s GDP is skewed towards services (60 per cent), which is emission-light, with a relatively lower energy intensity of output – a natural lid on emissions. Although emissions from the industrial sector (16 per cent) are higher, the emission intensity of agriculture, which involves both energy related emissions and non-energy related emissions is, in fact, higher than certain industries such as textiles, machinery and equipment as well as construction activity.
Energy production drives around three-quarters of global GHG emissions. In terms of the overall energy-mix, fossil fuel-based energy sources, viz., coal, oil and natural gas continue to dominate energy consumption in India. The share of coal in India’s electricity production is around 70 per cent (World Energy Outlook, 2021).
Estimated GHG Emissions Under Alternative Growth Scenarios
Emerging market and developing countries, including India, face a trade-off: they must continue to prioritise growth aspirations, while pursuing climate related nationally determined goals.
Scenarios have been developed on India’s roadmap to net zero by 2070, conditional on different assumptions for real GDP growth, the share of green energy in total energy demand and energy intensity of GDP. In the baseline scenario, the Indian economy grows at the rate of 6.6 per cent per year – which is its average growth rate over the last decade – but without taking actions to fulfil its environmental commitments.
A decline in energy usage per unit of economic activity by 2.3 per cent annually is assumed with steady carbon sequestration at 0.3 gigatonnes. This scenario is associated with increasing emissions.
An alternate scenario retains the GDP growth assumption of 6.6 per cent per year. It focuses on meeting immediate NDC objectives like reducing emission intensity and raising renewable energy’s share to 50 per cent in electricity generation by 2030.
Achieving net zero emissions by 2070 would require even more energy efficiency, with energy intensity declining to 5.0 per cent by 2070. Green energy’s share should reach 70 per cent by 2070.
Under this scenario, greenhouse gas emissions peak by 2032-33 and India reaches net zero by 2070. Energy consumption in 2070 is projected to be 1.8 times the level of 2021-22, compared to 7.2 times in the baseline scenario, but it will be difficult to maintain the long-term growth rate of 6.6 per cent.
A second alternate scenario assumes that India would achieve annual real GDP growth of 9.6 per cent between 2023-24 to 2047-48 which is required for it to become an advanced economy by 2047. With respect to climate goals, however, the assumptions in this scenario are the same as in the baseline. Higher growth would translate into even higher energy requirements and emissions.
The total primary energy requirement and net GHG emissions are estimated to be 12.5 times and 10.5 times higher, respectively, than their levels in 2021-22.
The best scenario, assuming a GDP growth of 9.6 per cent per annum over the period 2023-48 while adhering to the NDC commitments, will require more aggressive efforts than the current NDC targets, involving sharper declines in energy intensity and a higher proportion of green energy. Energy intensity, which has been steadily declining since the 1990s, needs to decrease by 5.4 per cent annually, and green energy’s share must rise to around 82 per cent by 2070. Energy consumption in 2070 would be 3.1 times higher than in 2021-22.
India’s aspiration to become an advanced economy by 2047 would need to take into account these considerations.
Green Initiatives by the RBI
There is a growing recognition that even if governments are the most influential agency for climate change, central banks and financial sector regulators/supervisors are going to become the major stakeholders because financial institutions play a key role in intermediation and hence have a more direct role in addressing climate change; and climate change is impacting the achievement of their mandates of price and financial stability.
In December 2007, the Reserve Bank mandated “Corporate Social Responsibility, Sustainable Development and Non-financial Reporting – Role of Banks” highlighting the importance of global warming and climate change in the context of sustainable development.
In 2015, loans for generation of renewable energy and public utilities run on non-conventional energy were made part of directed priority sector lending by banks.
In April 2021, the RBI joined the Network for Greening the Financial System (NGFS) to benefit from and contribute to the best practices in climate risk management and green finance.
In January 2022, the RBI conducted a Survey on Climate Risk and Sustainable Finance to assess the status of climate risk and sustainable finance in leading scheduled commercial banks.
In January-February 2023, the RBI issued sovereign green bonds worth US $ 2.2 billion (₹16,000 crore) in two tranches to mobilise resources for the Government for green infrastructural investments.
In April 2023, the RBI introduced a “Framework for Acceptance of Green Deposits” from June 01, 2023.
Conclusion
Central banks generally pursue a relatively narrow mandate focused on stability. Climate change is certainly not a part of it. At least till now.
Yet as more evidence accumulates that climate change is overwhelming the earth due to human activity, we cannot remain silent spectators. So, in the RBI we began from scratch and immersed ourselves in the economics of climate change.
Uncharacteristically, we pooled all that we could gather on the climate and put it into our flagship publication, The Report on Currency and Finance. This is our small contribution towards a greener, cleaner India.
To conclude, climate change threatens to overwhelm the earth, but we can reverse it because we have induced it. The time to act is now on several fronts.
Development and climate change are not necessarily pitted in a trade off – sustainable development is key. The climate is a global public good – global action is needed for humanity to live in harmony with our planet. And it is in our hands.