Date : 07/06/2023

Relevance: GS Paper 3: Sustainable Economy, Climate Change

Key Words: Carbon tax, Emission trading system, Financial risks, Sustainable growth

Context -

The Reserve Bank of India's recently released Currency and Finance Report for 2022-23, titled "Towards a Greener Cleaner India," addresses crucial issues related to climate change and outlines the central bank's future course of action and its implications for India's commitment to achieving net-zero status by 2070.

The Trade-offs Between Growth, Inflation, and Transition to a Net Zero Economy:

• The report acknowledges the challenges India faces in balancing its ambition to become an advanced economy by 2047 while reducing emissions.
• It highlights that a 9.6% annual GDP growth rate would lead to a 10.5-fold increase in net greenhouse gas (GHG) emissions compared to 2021-22 levels. To achieve both net-zero and advanced economy status, the report suggests increasing the share of green energy in primary energy consumption to 82% by 2070 and reducing emission intensity by 5.4% annually.

Impacts on Economic Output and Inflation:

• The report warns that adhering to nationally determined contributions could decrease economic output by up to 9% by 2049. However, a more ambitious target of achieving net zero by 2050 would limit losses from extreme weather events and decarbonization to 3% by 2049.
• The report highlights the trade-off between the short-term inflationary impacts of the status quo and the long-term benefits of transitioning to net zero by 2050.

Financial Risks and the Role of Fiscal Policy:

• The shift to a net zero economy will result in a shorter productive life for existing fossil fuel-based assets, posing risks to the banking sector, especially public-sector banks with exposure to these assets.
• The report also points out an increase in bad loans related to non-conventional energy. Additionally, the growing incidence of extreme weather events presents risks to assets and the banking system, leading to reduced output, incomes, and consumption.
• The report emphasizes the role of fiscal policy, advocating for a carbon tax or emission trading system as an effective intervention to address these risks.

Policy Alternatives:

• It makes a case for fiscal intervention through a carbon tax or an emission trading system. It finds that a carbon tax of $25 per tonne and $50 per tonne of Co2 under different scenarios can be effective, alongside other policy interventions. The importance of a carbon tax is indisputable, especially given the G7’s commitment to trade-based tax measures.

• The need for a taxonomy and sectoral pathways aligned with net zero is also highlighted, especially for sectors such as fisheries, textiles, land transport, and services.
• Fiscal policy and regulatory measures are deemed necessary to address these challenges alongside the RBI's risk management efforts.

Conclusion:

The RBI's Currency and Finance Report provides valuable insights into the challenges India faces in achieving its net zero commitment by 2070. It underscores the importance of balancing economic growth, inflation, and emission reduction efforts. The report calls for fiscal policy interventions, such as a carbon tax, while also recognizing the need for sector-specific pathways aligned with net zero goals. As the RBI takes on the responsibility of managing risks, policy measures must address distributional consequences and provide support for sectors facing legacy issues.

Source : The Indian Express