CEA Nageswaran says adaptation best insurance against climate change

The government’s top economist also said that the outcome of global warming is a net of both the negative and positive risks.

Chief Economic Adviser V Anantha Nageswaran has called for equal emphasis on adapting to climate change and reducing carbon emissions, saying that adaptation "is the best form of insurance" against rising temperatures and extreme weather events.

Speaking on February 15 at a workshop on climate finance, jointly organised by the finance ministry's department of economic affairs and the Asian Development Bank, Nageswaran said it is crucial that the insurance industry encourages adaptation among countries and the private sector when it comes to protecting against climate change.

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"Adaptation is the best form of insurance. And for that to occur, policy frameworks must put as much attention on adaptation and resilience as just only emissions…. Adaptation at all levels – individual, institutional, sovereign – is the best possible insurance," the government's top economist said.

According to Swiss Re, one of the world's largest reinsurers, global economic losses from natural disasters in 2022 amounted to $275 billion, with $125 billion of that being insured.

"Just as regular insurance contracts, for example in automobile insurance, reward the policyholders for good practices, for a good safety record – your premium comes down. In the context of climate finance, what are the good practices? It actually starts with adaptation," Nageswaran said.

Different risks

According to the chief economic adviser, the risks arising from climate change range from financial to political as well as policy. For instance, financial institutions must protect themselves from their assets getting "stranded" during the energy transition from fossil fuels to renewables. Nageswaran asked how any writing down of banks' assets in such cases would be managed, either through a top-up of their capital via some insurance or some sort of contingency capital.

The same energy transition also creates geopolitical risks, Nageswaran said, as avenues to process critical minerals and rare earth metals are fewer than producers of conventional energy. This makes countries more vulnerable as they move towards renewable energy sources.

Developing countries specifically face an even bigger issue in the form of blowback from the developed world despite taking measures to arrest climate change.

"By taking actions against climate change, developing countries are also insuring the lives and property of people and businesses in the developed world. If so, what is the premium we are getting in return for taking action on their part to insure the economic activity in the developed world? And obviously, the kind of premium that the developed world is contemplating paying to the developing world cannot be the carbon border adjustment mechanism. It has to be something more positive than that," Nageswaran said. The "obsessive fear of emissions" among developed countries created the risk of wrong policy prescriptions that could lead to output and job losses in emerging market economies.