India faces high costs to adapt to climate change

India’s Central Bank has said that will spend an estimated 85.6 trillion rupees ($1.05 trillion) by 2030 to adapt its various industries to be compliant with climate change norms, according to the Reserve Bank of India’s (RBI) Report on Currency and Finance.

The report warns that climate change is manifesting itself at an alarming scale and pace globally. Emerging and developing economies are the most vulnerable in terms of technological capabilities and access to finance for adaptation and mitigation.

The report points out that India will surpass China in 2023 to become the most populous country in the world. Alongside its aspiration to transform into the manufacturing hub of the world, India’s energy needs will rise and hence, a large and more intense involvement in global climate action is crucial. This also assumes urgency in view of India’s vulnerability to climate change.

The natural impact of climate change on India is evident in more than one way, according to the report. First, the average air surface temperature for India has risen by around 0.7 degree Celsius during 1901-2018. When compared globally, however, the rise in India’s temperature across all decades seems limited. The average temperature in India by the end of the 21st century is projected to increase by about 4.4 degrees Celsius relative to the average during 1976-2005.

India remains vulnerable to sea level increase, which threatens its low-lying small islands as well as major coastal cities. Precipitation has decreased. This is attributed to aerosol cooling over the northern hemisphere, which has offset the warming from GHGs. There has been a distinct increase in the occurrence of natural disasters in India in recent decades.

There has been a significant increase in climate action, both multilaterally and in individual countries. Alongside fiscal policies, recent years have seen a growing experimentation with regulatory instruments and hence, the role of central banks in combating climate change is coming to the fore.

It adds that central banks, as financial regulators, have several policy instruments at their disposal to influence investment decisions and the allocation of resources and credit to achieve the sustainability targets.

As reported by Reuters, the RBI report estimates suggest that green financing requirements in India could be at least 2.5% of GDP annually to address the infrastructure gap caused by climate events. The report also said a sector-specific approach to climate risk mitigation is called for, in view of the difficult policy trade-offs between containing near-term adverse output impact due to NDC (nationally determined contribution) commitments against larger output losses in the medium-run due to no policy action. “Different sectors of the economy have different emission intensities, it is advisable to not have a uniform climate mitigation strategy across sectors,” the report said, adding that without any policy action, India’s carbon dioxide emission levels may rise to 3.9 gigatonnes by 2030, from 2.7 gigatonnes in 2021.The RBI is expected to set a disclosure framework on climate-related financial risks and guidance on climate scenario analysis and stress testing shortly.

The Reuters report also points out that the RBI study stated that prior to the implementation of the green capital regulation, bad loans in the banking system needed to be reduced to alleviate potential financial risks. “If green capital regulation amplifies non-performing assets, it could impede monetary policy transmission.” As per current policies and NDCs, the impact on inflation is expected to be minimal, even though its volatility is expected to increase, the report stated. “Overall, delayed and lenient policy actions generate adverse impact on both growth and inflation outlook in the medium-to long-run.” It adds that there is a growing recognition that even if governments are the most influential agency for climate change, all institutions, including central banks and financial sector regulators/supervisors, are stakeholders and especially so in view of the existential threat to their central mandates. Central banks also face challenges to their financial stability mandate from climate risk which can affect the valuation of financial assets by influencing investors’ risk perceptions.

The consensus is hence coalescing to the position that central banks are uniquely placed to address climate change. They have a critical role in the promotion of green/sustainable finance through a mix of developmental and prudential regulatory policies27. With this growing recognition, there have been several global interventions to involve central banks and other financial authorities into climate action. The report underscores the need for speed and resolute commitment by analysing the manifestations of climate change through key physical indicators at the global level.