Managing Risks Of A Green Economy

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.