The Climate change phenomena observed around the globe have shed light on the essentiality of impactful climate deals to restrict global warming within 1.5-2 degrees Celsius, as delineated in the 2015 Paris Agreement. In the backdrop of imminent COP26 climate talks in Glasgow, a detailed analysis of the effects of these changes on world economies and the global financial system’s future stability is crucial.
Climate Change Cost in Economic Terms
There is consensus among economists about climate change’s potential impact on global output, regardless of disagreements over the magnitude. An estimate from the International Monetary Fund (IMF) indicates that unchecked global warming could result in a 7% decline in world output by 2100. However, the Network for Greening the Financial System (NFGS), a group of global central banks, offers a higher figure, suggesting a probable 13% decrease.
The Developing World: The Most Vulnerable Area
Climate change is expected to impact developing nations most severely. Currently, many impoverished individuals reside in tropical or low-lying regions which are already experiencing the repercussions of climate change, such as droughts and rising sea levels. Additionally, these countries often lack the resources necessary to mitigate the resulting damages.
Micro-Level Impact of Climate Change
The World Bank predicts that climate change could thrust an additional 132 million people into extreme poverty by 2030 due to factors like declining farming income, reduced outdoor labor productivity, increasing food costs, rampant disease, and the economic losses resultant from extreme weather conditions.
Analyzing the Net Zero Emission Scenario
‘Net zero emissions’ denotes the balance achieved between greenhouse gas emissions produced and those removed from the atmosphere. However, achieving this balance could have significant economic implications. A Carbon Tracker report estimates that over USD 1 trillion of business-as-usual investment in the oil and gas sector would become unviable in a genuinely low-carbon environment. Furthermore, the IMF has proposed the cessation of all fossil fuel subsidies, which could potentially spark a widespread unemployment crisis.
Below Par Carbon Pricing
Tax or permit schemes aim to incentivize green practices by pricing the damage caused by emissions. However, only a fifth of global carbon emissions are currently covered by such programs, with pricing averaging at USD 3 per tonne. This is significantly lower than the IMF’s recommended USD 75/tonne required to effectively cap global warming at 2°C.
Risk of Inflation and Failure of Green Decoupling
Any attempts to account for the polluting cost of fossil fuels are likely to result in price increases in some sectors. Additionally, sustainable growth—economic development without increased emissions—has so far proven elusive. Despite achieving high rates of economic growth, these gains often result from shifting pollutant production from one national territory to another.
Inadequate Green Finance
Rich nations, responsible for the majority of emissions post their industrial revolutions, have pledged to assist developing countries with an annual transfer of USD 100 billion. This commitment, however, remains largely unfulfilled.
Way Forward: Covering Up Economic Risk of Net Zero Emissions and More
The global financial system should be fortified against both the physical risks of climate change and the likely disruptions during the transition to net zero. Central banks and national treasuries must formulate a combined strategy to balance economic growth with sustainable development and include explicit climate mitigation policies in government budgets. Other prospective solutions include transitioning to a hydrogen economy for power generation, reducing reliance on conventional fossil fuels, and launching campaigns to mobilize climate finance with a focus on energy efficiency, the use of biofuels, carbon sequestration, and carbon pricing.