- Pakistan is among the countries likely to experience the most impact, but is not doing the needed research
There is indeed significant consensus among the international community, among scientists, social scientists, and policy makers, about the drastic impact of global warming on climate change, the underlying role of human beings in this enhanced impact on climate, and the overall impact of climate change on climate, economy, and life as we know it.
To highlight further, the Intergovernmental Panel on Climate Change (2014; page 40), stated, ‘Warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia. The atmosphere and ocean have warmed, the amounts of snow and ice have diminished, and the sea level has risen.’ In this regard, according to the US Global Change Research Programme 2018 (USGCRP), this climate change phenomenon has led to floods, storms, and droughts happening in higher frequency.
All this rapid change in climate has resulted in significant stress for the economy and the overall financial system. According to both USGCRP and NGFS (Network for Greening the Financial System, 2018), ‘Climate-related shifts in the physical environment can slow economic growth, increase volatility, and depreciate the value of business and household assets and property.’ Moreover, both NGFS (2018), and Glenn D Rudebusch (Climate Change and the Federal Reserve; 2019) highlight the impact of climate change and its increasing relevance for both financial advisors and central bankers in evolving macroeconomic- and financial stability related policies that internalise the impact of climate change related financial risks.
Similarly, policymakers in the State Bank of Pakistan should also evolve macroeconomic and financial policies that are climate change-conscious, in collaboration with ministries related with planning, finance and climate change; including involving input from other government authorities like the NDMA (National Disaster Management Authority) in such policymaking. This is important, since Pakistan is among the leading countries expected to be affected by climate change. The impact of rampant and severe smog cycles in winters is already causing significant damaging impact on life and economy; not to mention the impact of climate change on agricultural crop output, for instance, the recent negative impact on cotton crop yield.
Recently, the Federal Reserve Bank of San Francisco arranged a conference on ‘The Economics of Climate Change’, where some very relevant and thought-provoking papers were read on this topic by policymakers and researchers. The three main areas of focus included a) the impact of global warming on macro-economy, b) the link between climate risks and financial risks, and c) the effect of policy on climate change.
With regard to the impact on macro-economy, firstly, research indicates a long-term impact of climate change on worker productivity. Although research is both thin and is slow to pick up, nonetheless important research has surfaced where large-scale models of global economy and global climate have been constructed ‘to study the links among climate change, climate adaptation, and climate policy.’ Here, using one of these models, which involve a large number of equations and variables, Solomon Hsiang (UC Berkeley, Conference Paper, 2019) highlighted that workers exposed to warmer temperatures, in turn, reduced their productivity; especially of those workers who work in the outdoor, for example, in construction and agriculture.
Secondly, research has been actively studying the impact of policies that taxed carbon on economic growth and carbon dioxide emissions. For instance, employing an integrated assessment model (from the family of models indicated above) Conny Olovsson (Sveriges Riksbank; Conference Paper, 2019) not only emphasised the importance of taxing coal and oil towards meeting climate change concerns and mitigating the adverse impacts on global economy, but also provided quantification impacts of various policies in terms of economic losses and gains. Basically, his research ‘demonstrated that subsidising green energy without taxing coal or other fossil fuels is unlikely to reduce emissions, because energy subsidies tend to increase overall energy use.’
The above highlights the importance of conducting research in these and other related areas by policymakers; building up and learning upon the existing research. Climate change is happening fast, and requires a proactive response from countries; where unfortunately the pace of response is slow to say the least
Thirdly, addressing another area of research, where attention is paid to capture regional differences in terms of spill-overs (like climate-change-induced human migration) and climate change impacts, Hashem Pesaran (University of South Carolina; Conference Paper, 2019) pointed out ‘that the permanent losses in welfare can be substantial across the board.’
Addressing the overall second concern that climate risks influenced financial risks, Dana Kiku (University of Illinois at Urbana-Champaign; Conference Paper, 2019) through calculating the implied cost placed by investors on future carbon emissions, highlighted that ‘equity prices are sensitive to long-run temperature uncertainty and that such climate risk carries a risk premium.’ This kind of research is important for the financial sector of a developing country like Pakistan, especially for foreign investors– who are unfamiliar with local climate patterns– to internalise, so that the associated risks are better understood, and this enhanced level of certainty helps generate and retain higher portfolio investment inflows.
With regard to the unintended effects of policy on climate change, it was pointed out in the Conference by Joseph Shapiro (UC Berkeley) that ‘Tariffs imposed worldwide to protect certain industries from competition abroad implicitly subsidise carbon emissions. The reason is that tariffs are lower for high-emitting industries than for low-emitting industries.’ Moreover, Sandra Batten (Bank of England; Conference Paper, 2019) that ‘Trade policy and carbon pricing clearly fall outside a central bank’s mandate. But climate change has important consequences for monetary policy and financial stability.’
The above highlights the importance of conducting research in these and other related areas by policymakers; building up and learning upon the existing research. Climate change is happening fast, and requires a proactive response from countries; where unfortunately the pace of response is slow to say the least.
