Macroeconomic impacts of climate change
Ajaz Ahmed
What happens to an economy when it is hot outside? Globally, record-breaking temperatures have been witnessed in the past few years. Evidence shows that heat waves dampen economic output, causing GDP losses and exacerbating further global inequality. Similarly, projections for the US economy show that rising temperatures could reduce economic growth by up to one-third over the next century.
Nonetheless, the assumption that the economic damage from global warming is only confined to the agriculture sector is no longer true as climate change and environmental degradation pose significant risks to macroeconomy and financial systems. For example, climate change will affect individual and household income, sectors of the economy, energy markets, inflation variability, financial markets, innovation, and rising public debt, among others.
While rising global temperatures have profound impacts on economies all over the world, the phenomenon is still poorly understood due to the complexity of climate-related risks and their interactions with the real economy.
Scientific studies are being conducted to estimate the impact of global warming on different sectors of the economy. Nonetheless, there is a consensus that macroprudential measures are critical to mitigate climate-related risks, as without mitigation measures, physical risks from climate change-driven natural hazards — heat waves, windstorms, floods, and droughts — are likely to increase significantly.
Global warming and extreme weather phenomena can increase inflation and the debt-to-GDP ratio
While the marginal effects of temperature rise are different in different regions, the persistent increases in global temperature have serious implications for economic growth, productivity, and efficiency.
However, the sensitivity of different economies to the impacts of global warming depends on their reliance on different sectors of the economy, which can be more or less susceptible to changing temperatures. Thus, climate change will be a critical factor in shaping the responses to macroeconomic conditions in the near future.
Decarbonisation is no longer a matter of choice, as reducing carbon intensity in production processes and energy use is unavoidable in reducing carbon emissions per unit of output produced and making production cleaner. Yet, the decarbonisation of economies for net-zero targets will affect output and inflation, exerting changes in the monetary policy and macroeconomic conditions in most countries.
So, the key question for pandits of economics, especially those from the developing world, is how to reduce carbon-intensive economic activity without having serious repercussions for productivity, efficiency, and economic growth.
Climate change can potentially increase inflation and the debt-to-GDP ratio, resulting in economic uncertainty and tighter fiscal and monetary policies, which may lead to lower demand via lower spending and reduced economic activity. The transition to net zero would require the deployment of tools such as tax, subsidy, and regulation, resulting in increasing abatement costs.
This can potentially generate relative price shocks, pushing up aggregate inflation, which is likely to necessitate changes in monetary policy, not to mention the net zero transition exerting an effect on inflation would itself be difficult to handle. Furthermore, the structural transformations required for the transition to net zero are expected to alter the monetary policy channels and subsequent impact on inflation and economic activity.
Since climate change increases the frequency and severity of shocks, it may become increasingly difficult for central banks to regularly read through such shocks. In other words, identifying the regular shocks of an unknown nature to the economy will result in complicating the assessment of the monetary policy stance, which will often be confronted with the trade-off between output and inflation stabilisation.
Therefore, macroeconomic policy responses must take into account the impacts of climate-related extreme weather events, decarbonisation of economies, and net zero transition. As climate change impacts are often regional and global, invoking structural adjustment processes that may transcend national borders necessitates assessing macroeconomic implications and formulating models that provide insights with regional and sectoral differentiation.
The existing analytical frameworks and macroeconomic modelling tools are inadequate and unsuitable to grapple with the dynamic nature of climate uncertainty to design informed policy responses. Therefore, policymakers need to review and, where required, improve and align their toolkit to the new challenges. Nevertheless, reducing uncertainty and creating an environment that enables pacifying reactions will be highly critical in the future, as climate change will remain a major global risk for some time.
The writer has a PhD degree in economics from Durham University, UK and is director of research programmes for the Social Protection Resource Centre, Islamabad
Published in Dawn, The Business and Finance Weekly, June 30th, 2024
Ajaz Ahmed
Published July 1, 2024
What happens to an economy when it is hot outside? Globally, record-breaking temperatures have been witnessed in the past few years. Evidence shows that heat waves dampen economic output, causing GDP losses and exacerbating further global inequality. Similarly, projections for the US economy show that rising temperatures could reduce economic growth by up to one-third over the next century.
Nonetheless, the assumption that the economic damage from global warming is only confined to the agriculture sector is no longer true as climate change and environmental degradation pose significant risks to macroeconomy and financial systems. For example, climate change will affect individual and household income, sectors of the economy, energy markets, inflation variability, financial markets, innovation, and rising public debt, among others.
While rising global temperatures have profound impacts on economies all over the world, the phenomenon is still poorly understood due to the complexity of climate-related risks and their interactions with the real economy.
Scientific studies are being conducted to estimate the impact of global warming on different sectors of the economy. Nonetheless, there is a consensus that macroprudential measures are critical to mitigate climate-related risks, as without mitigation measures, physical risks from climate change-driven natural hazards — heat waves, windstorms, floods, and droughts — are likely to increase significantly.
Global warming and extreme weather phenomena can increase inflation and the debt-to-GDP ratio
While the marginal effects of temperature rise are different in different regions, the persistent increases in global temperature have serious implications for economic growth, productivity, and efficiency.
However, the sensitivity of different economies to the impacts of global warming depends on their reliance on different sectors of the economy, which can be more or less susceptible to changing temperatures. Thus, climate change will be a critical factor in shaping the responses to macroeconomic conditions in the near future.
Decarbonisation is no longer a matter of choice, as reducing carbon intensity in production processes and energy use is unavoidable in reducing carbon emissions per unit of output produced and making production cleaner. Yet, the decarbonisation of economies for net-zero targets will affect output and inflation, exerting changes in the monetary policy and macroeconomic conditions in most countries.
So, the key question for pandits of economics, especially those from the developing world, is how to reduce carbon-intensive economic activity without having serious repercussions for productivity, efficiency, and economic growth.
Climate change can potentially increase inflation and the debt-to-GDP ratio, resulting in economic uncertainty and tighter fiscal and monetary policies, which may lead to lower demand via lower spending and reduced economic activity. The transition to net zero would require the deployment of tools such as tax, subsidy, and regulation, resulting in increasing abatement costs.
This can potentially generate relative price shocks, pushing up aggregate inflation, which is likely to necessitate changes in monetary policy, not to mention the net zero transition exerting an effect on inflation would itself be difficult to handle. Furthermore, the structural transformations required for the transition to net zero are expected to alter the monetary policy channels and subsequent impact on inflation and economic activity.
Since climate change increases the frequency and severity of shocks, it may become increasingly difficult for central banks to regularly read through such shocks. In other words, identifying the regular shocks of an unknown nature to the economy will result in complicating the assessment of the monetary policy stance, which will often be confronted with the trade-off between output and inflation stabilisation.
Therefore, macroeconomic policy responses must take into account the impacts of climate-related extreme weather events, decarbonisation of economies, and net zero transition. As climate change impacts are often regional and global, invoking structural adjustment processes that may transcend national borders necessitates assessing macroeconomic implications and formulating models that provide insights with regional and sectoral differentiation.
The existing analytical frameworks and macroeconomic modelling tools are inadequate and unsuitable to grapple with the dynamic nature of climate uncertainty to design informed policy responses. Therefore, policymakers need to review and, where required, improve and align their toolkit to the new challenges. Nevertheless, reducing uncertainty and creating an environment that enables pacifying reactions will be highly critical in the future, as climate change will remain a major global risk for some time.
The writer has a PhD degree in economics from Durham University, UK and is director of research programmes for the Social Protection Resource Centre, Islamabad
Published in Dawn, The Business and Finance Weekly, June 30th, 2024
Economic fallout
WHAT happens to an economy when it is hot outside? Globally, record-breaking temperatures have been witnessed in the past few years. There is evidence that heatwaves dampen economic output, causing GDP losses and exacerbating global inequality. For instance, projections for the US economy show that rising temperatures could reduce economic growth by up to one-third over the next century.
Moreover, the assumption that economic damage from global warming is confined to the agriculture sector is no longer true, as climate change and environmental degradation pose significant risks to the macro economy and financial systems. For example, climate change will affect individual and household income, sectors of the economy, energy markets, inflation variability, financial markets, innovation, and rising public debt, among other things.
While rising global temperatures have a profound impact on economies all over the world, the phenomenon is still poorly understood due to the complexity of climate-related risks and their interactions with the real economy. Scientific studies are being conducted to estimate the impact of global warming on different sectors of the economy. However, there is consensus that macro-prudential measures are critical to mitigating climate-related risks, as without mitigation measures, physical risks from climate change-driven natural hazards — heatwaves, windstorms, floods, and droughts — are likely to increase significantly.
While the marginal effects of temperature rise are different in different regions, persistent increases in global temperature have serious implications for economic growth, productivity, and efficiency. However, the sensitivity of different economies to the impact of global warming depends on their reliance on different sectors of the economy, which can be susceptible to changing temperatures. Thus, climate change will be a critical factor in shaping responses to macroeconomic conditions in the near future.
Climate change can result in economic uncertainty.
Decarbonisation is no longer a matter of choice, as reducing carbon intensity in production processes and energy use is unavoidable to lower carbon emissions per unit of output produced and make production cleaner. Yet, the decarbonisation of economies for net-zero targets will affect both output and inflation, exerting changes in monetary policy and macroeconomic conditions in most countries. So, the key question for economy pundits, especially those from the developing world, is how to reduce carbon-intensive economic activity, without it having consequences for productivity, efficiency, and economic growth.
Climate change can potentially increase inflation and the debt-to-GDP ratio, resulting in economic uncertainty and tighter fiscal and monetary policies, which may lead to lower demand via lower spending and reduced economic activity. The transition to net zero would require the deployment of tools such as tax, subsidy, and regulation, resulting in increasing abatement costs. This can potentially generate relative price shocks, pushing up aggregate inflation, which is likely to necessitate changes in monetary policy, not to mention net-zero transition having an effect on inflation. Furthermore, the structural transformations required for the transition to net zero are expected to alter monetary policy channels.
Since climate change increases the frequency and severity of shocks, it may become very difficult for central banks to regularly read such shocks. In other words, identifying regular shocks — of an unknown nature — to the economy, will complicate the assessment of the monetary policy stance, which will often find itself confronting a trade-off between output and inflation stabilisation. Therefore, macroeconomic policy responses must take into account the impact of extreme weather events, the decarbonisation of economies, and net-zero transition.
As the impact of climate change is regional and global, it may invoke structural adjustment processes that transcend national borders, thus necessitating assessment of macroeconomic implications and formulation of models that provide insight with regional and sectoral differentiation.
Existing analytical frameworks and macroeconomic modelling tools are inadequate and unsuitable for grappling with the dynamic nature of climate uncertainty and design-informed policy responses. Therefore, policymakers need to review and, where required, improve and align their toolkit to adapt to the new challenges.
Nevertheless, reducing uncertainty and creating an enabling environment to pacify reactions will be highly critical in the future as climate change will remain a major global risk for some time.
The writer has a PhD degree in economics from Durham University, UK. He is director of research programmes for the Social Protection Resource Centre, Islamabad.
Published in Dawn, July 1st, 2024
Published July 1, 2024
DAWN
WHAT happens to an economy when it is hot outside? Globally, record-breaking temperatures have been witnessed in the past few years. There is evidence that heatwaves dampen economic output, causing GDP losses and exacerbating global inequality. For instance, projections for the US economy show that rising temperatures could reduce economic growth by up to one-third over the next century.
Moreover, the assumption that economic damage from global warming is confined to the agriculture sector is no longer true, as climate change and environmental degradation pose significant risks to the macro economy and financial systems. For example, climate change will affect individual and household income, sectors of the economy, energy markets, inflation variability, financial markets, innovation, and rising public debt, among other things.
While rising global temperatures have a profound impact on economies all over the world, the phenomenon is still poorly understood due to the complexity of climate-related risks and their interactions with the real economy. Scientific studies are being conducted to estimate the impact of global warming on different sectors of the economy. However, there is consensus that macro-prudential measures are critical to mitigating climate-related risks, as without mitigation measures, physical risks from climate change-driven natural hazards — heatwaves, windstorms, floods, and droughts — are likely to increase significantly.
While the marginal effects of temperature rise are different in different regions, persistent increases in global temperature have serious implications for economic growth, productivity, and efficiency. However, the sensitivity of different economies to the impact of global warming depends on their reliance on different sectors of the economy, which can be susceptible to changing temperatures. Thus, climate change will be a critical factor in shaping responses to macroeconomic conditions in the near future.
Climate change can result in economic uncertainty.
Decarbonisation is no longer a matter of choice, as reducing carbon intensity in production processes and energy use is unavoidable to lower carbon emissions per unit of output produced and make production cleaner. Yet, the decarbonisation of economies for net-zero targets will affect both output and inflation, exerting changes in monetary policy and macroeconomic conditions in most countries. So, the key question for economy pundits, especially those from the developing world, is how to reduce carbon-intensive economic activity, without it having consequences for productivity, efficiency, and economic growth.
Climate change can potentially increase inflation and the debt-to-GDP ratio, resulting in economic uncertainty and tighter fiscal and monetary policies, which may lead to lower demand via lower spending and reduced economic activity. The transition to net zero would require the deployment of tools such as tax, subsidy, and regulation, resulting in increasing abatement costs. This can potentially generate relative price shocks, pushing up aggregate inflation, which is likely to necessitate changes in monetary policy, not to mention net-zero transition having an effect on inflation. Furthermore, the structural transformations required for the transition to net zero are expected to alter monetary policy channels.
Since climate change increases the frequency and severity of shocks, it may become very difficult for central banks to regularly read such shocks. In other words, identifying regular shocks — of an unknown nature — to the economy, will complicate the assessment of the monetary policy stance, which will often find itself confronting a trade-off between output and inflation stabilisation. Therefore, macroeconomic policy responses must take into account the impact of extreme weather events, the decarbonisation of economies, and net-zero transition.
As the impact of climate change is regional and global, it may invoke structural adjustment processes that transcend national borders, thus necessitating assessment of macroeconomic implications and formulation of models that provide insight with regional and sectoral differentiation.
Existing analytical frameworks and macroeconomic modelling tools are inadequate and unsuitable for grappling with the dynamic nature of climate uncertainty and design-informed policy responses. Therefore, policymakers need to review and, where required, improve and align their toolkit to adapt to the new challenges.
Nevertheless, reducing uncertainty and creating an enabling environment to pacify reactions will be highly critical in the future as climate change will remain a major global risk for some time.
The writer has a PhD degree in economics from Durham University, UK. He is director of research programmes for the Social Protection Resource Centre, Islamabad.
Published in Dawn, July 1st, 2024
Ignoring solar and wind potential
Nasir Jamal
Published July 1, 2024
DAWN
Pakistan’s National Electricity Policy 2021 pledges that a “sustainable renewable energy market shall be developed, with a progressively increasing share in power generation as per the Indicative Generation Capacity Expansion Plan (IGCEP) based on the least cost principle.”
However, the latest IGCEP 2024-34 iteration, which outlines the country’s future energy generation strategy over a 10-year horizon to ensure reliable and sustainable power supply, does quite the opposite. It drastically slashes the share of cost-effective variable renewable energy (VRE) — solar and wind — in the total energy mix and declares expensive hydropower, nuclear and imported and Thar coal-based generation schemes as “committed” or “strategic” in complete disregard of the principle of the least cost.
“The VRE share has been reduced to 13.3 per cent in the energy mix from the previously projected 29.6pc in IGCEP 2022-31 through a substantial decrease in the planned contribution of wind, solar and other VRE sources,” notes a briefing paper prepared by the Pakistan Renewable Energy Coalition (REC). Notably, the solar share, including net metering, is projected to drop to 10pc by 2034.
The paper “Neglected Potential: How the latest IGCEP fails renewable energy future in Sindh and Balochistan” says the new IGCEP version not just goes against the Alternate and Renewable Energy (ARE) Policy, 2019 target of raising the VRE share in the energy mix to 30pc by 2030 and breaches the principle of the least cost to hold down consumer electricity tariffs but also “disproportionately overlooks the renewable energy potential in Sindh and Balochistan, which threatens to undermine the regions’ economic development and the nation’s commitment to renewable energy targets”.
The new IGCEP plan drastically slashes the share of cost-effective variable renewable energy in Sindh and Balochistan
Divergence from policy targets on VRE integration sends negative market signals, hurting investor confidence in the renewables sector and impeding the development of a robust VRE market, violating national electric policy.
As per the World Bank’s “Variable Renewable Energy Integration and Planning Study”, the US National Renewable Energy Laboratory estimates the theoretical potential for wind generation in Pakistan at 340GW, mainly in Sindh and Balochistan.
For Balochistan, the situation is abysmal as currently no solar or wind projects have been installed there, and despite the immense solar and wind integration potential of 1050MW and 1850MW, respectively, at interconnection-ready sites requiring no grid strengthening, no capacity additions have been committed or optimised in IGCEP. According to the World Bank study, Balochistan’s realisable solar and wind potential when grid strengthening measures are in place could be as high as 3.5GW and 6GW, respectively, by 2030.
The new IGCEP also overlooks feeder-based distributed generation, battery energy storage systems, and hybrid renewable energy solutions, and the quantum of net metering has also been reduced. The IGCEP 2022 had indicated that hybrid RE technologies would be considered in future iterations based on their operational feasibility studies, but they have not been considered at all.
Further, the new IGCEP version raises concerns about its overreliance on hydropower, where 70pc of the committed projects are hydro-based. By 2034, the plan projects that 60pc of energy demand will be met by hydro compared to 25pc indicated in its 2020 iteration. Likewise, solar has dropped to 25pc from 34pc and wind share from nearly 18pc to 0.5pc, mostly at the cost of the renewable energy potential of Sindh and Balochistan. Hydropower and Thar coal are favoured for generation expansion for their “potential to lower consumer costs and enhance energy security”.
Moreover, the new IGCEP iteration declares most projects as strategic, giving them preferential treatment of “committed projects” in violation of the least cost principle. Resultantly, 19,138MW (99.95pc) out of the planned capacity additions of 19,224MW by 2034 is committed capacity.
Of these, the vast majority (20 projects worth 13,672MW) are large public sector hydro (11,462MW), nuclear (1,200MW), and imported coal projects (960MW) whose financial and economic costs have neither been disclosed, nor transparently modelled nor acknowledged in the expansion plan. Only 87MW (0.05pc) has been optimised on the least cost basis — and even this optimised 87MW will originate from two hydropower projects, the REC argues.
“The emphasis on hydropower and conventional power generation sources diminishes the renewable energy opportunities in Sindh and Balochistan,” says Ammar Qaseem, an energy specialist at Renewables First. He doesn’t agree with the argument, citing the lack of transmission infrastructure for ignoring Balochistan and Sindh’s VRE potential.
“The 20pc VRE target can be largely achieved by utilising spare capacity at existing substations, without the need for immediate grid upgrades by strategically building solar and wind power close to existing substations and transmission lines,” he adds.
Therefore, a re-evaluation of the IGCEP is essential to harness the full potential of Pakistan’s renewable resources and ensure a balanced and inclusive approach to energy and economic development. “This re-evaluation would enable Sindh and Balochistan to leverage their renewable energy potential, driving regional development and contributing significantly to Pakistan’s overall energy landscape,” the REC concludes.
Published in Dawn, The Business and Finance Weekly, July 1st, 2024
Pakistan’s National Electricity Policy 2021 pledges that a “sustainable renewable energy market shall be developed, with a progressively increasing share in power generation as per the Indicative Generation Capacity Expansion Plan (IGCEP) based on the least cost principle.”
However, the latest IGCEP 2024-34 iteration, which outlines the country’s future energy generation strategy over a 10-year horizon to ensure reliable and sustainable power supply, does quite the opposite. It drastically slashes the share of cost-effective variable renewable energy (VRE) — solar and wind — in the total energy mix and declares expensive hydropower, nuclear and imported and Thar coal-based generation schemes as “committed” or “strategic” in complete disregard of the principle of the least cost.
“The VRE share has been reduced to 13.3 per cent in the energy mix from the previously projected 29.6pc in IGCEP 2022-31 through a substantial decrease in the planned contribution of wind, solar and other VRE sources,” notes a briefing paper prepared by the Pakistan Renewable Energy Coalition (REC). Notably, the solar share, including net metering, is projected to drop to 10pc by 2034.
The paper “Neglected Potential: How the latest IGCEP fails renewable energy future in Sindh and Balochistan” says the new IGCEP version not just goes against the Alternate and Renewable Energy (ARE) Policy, 2019 target of raising the VRE share in the energy mix to 30pc by 2030 and breaches the principle of the least cost to hold down consumer electricity tariffs but also “disproportionately overlooks the renewable energy potential in Sindh and Balochistan, which threatens to undermine the regions’ economic development and the nation’s commitment to renewable energy targets”.
The new IGCEP plan drastically slashes the share of cost-effective variable renewable energy in Sindh and Balochistan
Divergence from policy targets on VRE integration sends negative market signals, hurting investor confidence in the renewables sector and impeding the development of a robust VRE market, violating national electric policy.
As per the World Bank’s “Variable Renewable Energy Integration and Planning Study”, the US National Renewable Energy Laboratory estimates the theoretical potential for wind generation in Pakistan at 340GW, mainly in Sindh and Balochistan.
For Balochistan, the situation is abysmal as currently no solar or wind projects have been installed there, and despite the immense solar and wind integration potential of 1050MW and 1850MW, respectively, at interconnection-ready sites requiring no grid strengthening, no capacity additions have been committed or optimised in IGCEP. According to the World Bank study, Balochistan’s realisable solar and wind potential when grid strengthening measures are in place could be as high as 3.5GW and 6GW, respectively, by 2030.
The new IGCEP also overlooks feeder-based distributed generation, battery energy storage systems, and hybrid renewable energy solutions, and the quantum of net metering has also been reduced. The IGCEP 2022 had indicated that hybrid RE technologies would be considered in future iterations based on their operational feasibility studies, but they have not been considered at all.
Further, the new IGCEP version raises concerns about its overreliance on hydropower, where 70pc of the committed projects are hydro-based. By 2034, the plan projects that 60pc of energy demand will be met by hydro compared to 25pc indicated in its 2020 iteration. Likewise, solar has dropped to 25pc from 34pc and wind share from nearly 18pc to 0.5pc, mostly at the cost of the renewable energy potential of Sindh and Balochistan. Hydropower and Thar coal are favoured for generation expansion for their “potential to lower consumer costs and enhance energy security”.
Moreover, the new IGCEP iteration declares most projects as strategic, giving them preferential treatment of “committed projects” in violation of the least cost principle. Resultantly, 19,138MW (99.95pc) out of the planned capacity additions of 19,224MW by 2034 is committed capacity.
Of these, the vast majority (20 projects worth 13,672MW) are large public sector hydro (11,462MW), nuclear (1,200MW), and imported coal projects (960MW) whose financial and economic costs have neither been disclosed, nor transparently modelled nor acknowledged in the expansion plan. Only 87MW (0.05pc) has been optimised on the least cost basis — and even this optimised 87MW will originate from two hydropower projects, the REC argues.
“The emphasis on hydropower and conventional power generation sources diminishes the renewable energy opportunities in Sindh and Balochistan,” says Ammar Qaseem, an energy specialist at Renewables First. He doesn’t agree with the argument, citing the lack of transmission infrastructure for ignoring Balochistan and Sindh’s VRE potential.
“The 20pc VRE target can be largely achieved by utilising spare capacity at existing substations, without the need for immediate grid upgrades by strategically building solar and wind power close to existing substations and transmission lines,” he adds.
Therefore, a re-evaluation of the IGCEP is essential to harness the full potential of Pakistan’s renewable resources and ensure a balanced and inclusive approach to energy and economic development. “This re-evaluation would enable Sindh and Balochistan to leverage their renewable energy potential, driving regional development and contributing significantly to Pakistan’s overall energy landscape,” the REC concludes.
Published in Dawn, The Business and Finance Weekly, July 1st, 2024
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