Context: The transition to ‘Green Economy’ involves many risks.
Climate change risks: An overview of recent studies
Intergovernmental Panel on Climate Change (IPCC) Report 2021: Human activity is affecting climate in an unprecedented manner triggering irreversible damages.
Climate change will affect lives and livelihoods across the globe with some countries getting disproportionately impacted
Report by Swiss Re Institute: Climate change could reduce global GDP by 18% by 2050.
International Labour Organization Report (2019): Heat stress could result into productivity loss up to 80 million full-time jobs globally in 2030.
Risks associated with rapid transition to a green economy
Green business risks: A rapid transition to renewable energy, which is necessary, will disrupt a number of businesses.
Coal industry: As India moves rapidly towards renewables, capacity utilisation in coal plants would decline, affecting return on investment. This will have implications for both debt and equity holders.
Automotive sector: As the business moves towards electric vehicles, the market will be disrupted with some legacy manufactures and component makers going out of business.
Monetary policy risks: Besides financial stability, the objective of maintaining price stability could also get affected, especially in a country like India where food is a large part of the consumption basket.
Blind to climate change is risky response: Not adjusting the central bank reaction functions to climate change will result in suboptimal policy choices.
Knowledge gap: More researches are needed to gauge how central banks can respond to climate risks and maintain price stability.
Fierce fiscal risks: India’s transition to a green economy will pose serious fiscal risks, both at the central and state level.
Huge revenue dependence on petroleum products under threat: Contribution of the petroleum sector to general government revenue was over Rs.6.7 trillion.
Shifting this burden to power sector which further complicates as Indian discom companies are already burdened with Rs.6 trillion debt.
Way Forward
Direct tax and GST system will need to be overhauled: Both central and state governments will have to reduce dependence on petroleum products for revenue generation.
Higher taxes on petroleum products shall incentivise transition to renewables, and it should not be a fiscal compulsion.
Mess in the power sector will need to be fixed once and for all.