Net Zero Challenge
- The RBI recently released its “Towards a greener cleaner India” report, which covers a wide range of topics and outlines the central bank’s future path of action.
- It serves as a timely update to its earlier findings, which had many wondering how it will address climate change.
The Sustainable Economy’s Contribution to Combating Climate Change: (Report Highlights):
- India has pledged to achieve net zero status at CoP26 by 2070. The analysis shows that the path to net zero will not be easy.
- The RBI offers a much-needed conceptual framework for analysing trade-offs between economic growth, inflation, and efforts to move towards a net-zero economy.
- India’s desire to become an advanced economy by 2047 and its desire to reduce its emissions are at odds.
- A 9.6% annual GDP growth rate would result in net GHG emissions that are 10.5 times higher than they were in 2021–2022.
- India would need to increase the proportion of green energy in primary energy consumption to 82 percent by 2070 and decrease emission intensity by 5.4 percent yearly in order to meet the dual goals of net zero by 2070 and advanced economy status.
- It is alarming to learn that nationally decided contribution will reduce economic production by as much as 9% by 2049, according to the analysis.
- The losses from extreme weather events and decarbonization could only be reduced to 3% by 2049 with a more ambitious approach of achieving net zero by 2050. How can India scale its ambition given the limitations imposed by investment costs is the key policy challenge.
- The report compares the existing quo’s inflationary effects to the option of reaching net zero by 2050.
- The latter will result in price increases during the following three years but will, in the long run, tame effects of persistent inflation. Therefore, it is evident from the empirical data that a global transition to net zero by 2050 could be preferable.
The report emphasises the risk associated with assets dependent on fossil fuels:
- The productive life of current fossil fuel-based assets will be limited as the economy shifts towards renewable sources of energy, exposing the banking sector (via loans) to these assets.
- For banks in the public sector, these risks are more obvious. But there are other sources of financial risk as well; non-conventional energy saw an increase in the proportion of industry bad loans. Associated financial system risks are predicted to cost 5–6% of GDP annually in investment costs.
- The rising frequency of catastrophic weather occurrences poses hazards to assets and, as a result, to the banking system. According to the RBI, a one-period climatic shock can cause output to drop by 1% for up to five quarters. As a result, incomes and consumption will decline.
Fiscal policy’s role in mitigating climate risk:
- The importance of fiscal policy is emphasised throughout the paper. It argues in favour of fiscal action in the form of a carbon tax or an emission trading scheme.
- It concludes that, in addition to other policy measures, a carbon tax of between $25 and $50 per tonne of CO2 can be effective.
- Unquestionably, a carbon tax is essential, especially in light of the G7’s support for trade-based tax policies. But the effects on distribution are not even mentioned.
- The analysis’s recommendations for the carbon tax rate that is most compatible with various growth goals are still uncertain. Additionally, it is not apparent which tax redistribution strategies can lessen the effects on distribution.
Conclusion:
- The report establishes the direction for monetary policy going forward. The necessity for a taxonomy and sectoral paths that are linked with net zero are two policy issues that are also laid out in the report.
- It does, however, touch on the significance of shifting manufacturing to industries like fisheries, textiles, land transportation, and services that require less energy. For these industries, which have long dealt with legacy problems, there is no plan. To confront the issues, fiscal policy and regulatory measures are also required as the RBI assumes responsibility for managing risks.
