Last week, Nicolai Tangen, who manages Norway’s sovereign wealth fund, said it would be “quite difficult” to bring down global inflation. He cited climate change as one of the reasons for this, saying it is causing food prices to soar and affecting productivity.
Tangen’s comments come at a time when central banks around the world are struggling to contain inflation. Soaring food and energy bills are the main drivers. There are other factors that are playing a role, though, including supply-chain disruptions and the war in Ukraine.
The US Federal Reserve and the Bank of England have already raised interest rates several times this year in an effort to cool their respective economies. In India, retail inflation surged to 7.4 percent in July, breaching the Reserve Bank of India’s (RBI) upper tolerance limit of 6 percent for the first time in five months. The RBI had already warned last month that the impact of climate shocks and uncertainties surrounding them could make it difficult to measure and manage inflation, and to anchor inflation expectations.
But how is climate change exacerbating inflation, and how serious is its impact? Let’s find out.
Food for thought
Earth’s temperature has risen by an average of 0.08° Celsius per decade since 1880, as per the US National Oceanic and Atmospheric Administration. The rate of warming since 1981 is more than twice as fast: 0.18° C per decade, with the 10 warmest years in the historical record having all occurred since 2010. “The era of global boiling has arrived,” UN secretary general António Guterres said after scientists confirmed July 2023 was the world’s hottest month on record.
As the world heats up, climate change has emerged as not only an environmental challenge but also an economic one. A 2023 paper published by the European Central Bank and the Potsdam Institute for Climate Impact Research found that higher-than-average temperatures are driving up the cost of food and other goods and services in 121 countries. Overall, it could increase global inflation by as much as 1 percent every year until 2035.
When it comes to food inflation, the report found that future warming could hike up prices by as much as 3 percent. “These results suggest that climate change poses risks to price stability by having an upward impact on inflation, altering its seasonality and amplifying the impacts caused by extremes,” says the report.
In India, rising temperatures, heat waves and changing rainfall patterns are already affecting crop yields and impacting the prices of agricultural produce. In the last two months alone, tomato prices have surged, rising as high as Rs 150-200 per kg in key cities. With vegetables having a 6.04 percent weightage on the overall retail inflation, it has played a small role in the rise of inflation.
Factor these in
Climate change is also increasing the demand for energy, as people need it to cool their homes and workplaces more. This puts additional strain on resources. In India, for instance, coal is the most important and abundant fossil fuel. It accounts for 55 percent of the country's energy needs. Rising demand results in a strain on fossil energy sources and causes prices to increase. This hike, in turn, is passed on to consumers. It impacts low-income households the most, as it drives up electricity bills and reduces disposable income that is needed for basic needs, including food. It also results in higher transportation costs, which drives up inflation.
Extreme weather events, caused by climate change, also damage infrastructure such as roads, bridges, and power lines. This can disrupt supply chains and lead to higher prices for goods and services. This year, for example, Rs 200 crore has been sanctioned for repairing and restoring the roads and bridges connecting national highways in Himachal Pradesh. They had been damaged due to recent heavy rains in the state, and left several areas cut off for days.
Lastly, climate change leads to loss of productivity, as people are forced to work in less productive conditions such as during heat waves or droughts. This can also contribute to inflation. The RBI estimates that up to 4.5 percent of India's GDP could be at risk by 2030, owing to lost labour hours from extreme heat and humidity.
The inflationary impacts of climate change are likely to become more severe in the future, as the planet continues to warm. Policymakers will need to take steps to mitigate these impacts, such as investing in renewable energy and climate-resilient infrastructure. They will also need to develop policies to help households and businesses cope with higher prices. But, foremost, world leaders will need to act now to address climate change. The longer we wait, the more severe the impacts will be, and the more difficult it will be to mitigate them.
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