RBI Warns Of Loss In GDP, Labour Productivity Due To Climate Crisis

The Reserve Bank of India has cautioned that the country will see significant loss in economic output and labour productivity due to the climate crisis if global temperature rise soars over 2 degrees Celsius.

In a scenario where only current policies to tackle the climate crisis are implemented, the RBI forecasts nearly 8% loss in economic output by 2100 from 2015-levels, it said in its annual report for 2021-22. Labour productivity could decline by almost 15% during the same period.

The RBI's views reflect what climate scientists and economists have been warning about for years. Increasing extreme weather events, such as heatwaves, will hit crop output and lead to fewer working hours in a day. Besides, flash floods and hurricanes could cause economic damage through physical risk to infrastructure. There are also other transition risks that lead to a reduction in value of carbon-heavy industries and require significant investment costs from energy firms.

The flipside is that an orderly transition to global net-zero emissions by 2050 will lead to higher inflation.

"Energy consumption and CO2 emissions are significantly reduced under the scenarios involving global coordination to control temperature rise," the RBI said. "However, they [are] associated with a significant rise in commodity and carbon prices."

According to the central bank, higher carbon prices will feed into inflation resulted in costlier raw materials. Yet, it noted that despite being inflationary an effective transition can help limit substantial losses in economic output and productivity.

"A successful implementation of emission reduction for India carries inflationary risks, which will need to be managed through carefully crafted transition plans. The output losses associated with the transition may be limited," the RBI said.

Also, central banks across the globe, it said, are increasingly been drawn into climate risk management because of the implication of extreme weather events on business cycles and monetary policy.

"Physical and transition risks for the financial sector have raised financial stability concerns among central banks," it said.