Absolute decoupling yet to happen between carbon emission, GDP growth globally, says RBI deputy governor

Pointing out that several central banks have expressed reservations about engaging with climate-related issues, while others have expressed inability in view of lacking the instruments to deal with it, Dr. Patra said the ominous reality was that the climate was striking back.

File picture of RBI deputy governor Michael Debabrata Patra

While the growing recognition of the adverse effects of climate change had led to some recent actions that were weakening the correlation between carbon emissions and GDP growth globally, an absolute decoupling was yet to happen, Michael Debabrata Patra, deputy governor, Reserve Bank of India (RBI) said at the New York Fed Central Banking Seminar organised by the Federal Reserve Bank, New York, on October 9, 2023 at New York, USA.

“Climate change can affect price stability through supply shocks such as food and energy shortages and through a decline in productive capacity. Demand shocks can arise due to the loss of wealth of firms and households on account of frequent natural disasters,” Dr. Patra said. 

“Physical and transition risks can affect the balance sheets of financial institutions and banks, limiting the flow of credit to the real economy. These destructive forces interact with each other to form vicious feedback loops,” he added. 

Hence, almost all countries have committed to timelines for the transition to net zero emissions, with the majority committing to achieve this target by 2050, the Deputy Governor said. 

While 23% of the countries have made the target a legal obligation, 18% have proposed to make it into a legal obligation and the remaining 59% have made their pledges in official policy documents. 

All these countries together account for around 73% of global CO2 emissions (59 countries have proposed actions or are in discussions), he told the gathering.

Pointing out that several central banks have expressed reservations about engaging with climate related issues to avoid mission creep, while others have expressed inability in view of lacking the instruments to deal with it, Dr. Patra said the ominous reality was that the climate was striking back. 

“Central banks cannot be immune or inactive any longer,” he said. 

Emphasising that the earth’s climate has “changed in the past, and quite drastically”, he said as per findings about the earth’s temperature over the last 500 million years released by the Smithsonian National Museum of Natural History warm temperatures were dominating most of the time, with global temperatures repeatedly rising above 26.6°C and even above 32°C — much too warm for ice sheets or perennial sea ice. 

“In fact, polar caps cannot exist when the temperature crosses 18°C. This is the fever line. About 250 million years ago, it was too hot for even swamps to exist! In the last 100 million years, global temperatures have peaked twice. In fact, during much of the Paleocene and early Eocene epochs 55-56 million years ago, the poles were free of ice caps, and palm trees and crocodiles lived above the Arctic Circle,” he said. 

“About 60 million years ago, the earth’s climate changed dramatically due to the devastating impact of a large asteroid colliding with the earth, leading to the extinction of dinosaurs. However, one dinosaur survived — the theropod group, which included T-rex. It evolved into the birds that rule earth’s skies today,” he added. 

Dr. Patra said modern human civilisation, which had developed over just the past 10,000 years or so, had seen a period of low temperatures and relative global climate stability. Compared to most of the earth’s history, this period had been cold at 14.8°C, known as the inter-glacial period.

The earth’s temperature has begun rising. In September 2023 it averaged 16.4°C, 1.75 degrees warmer than the pre-industrial period of 1850-1900 (World Meteorological Organisation (WMO), October 2023)6. The warming up of the climate can have cataclysmic consequences,” he cautioned. 

On the steps taken by the RBI to handle climate change, Dr. Patra said there was a growing recognition that even if governments were the most influential agency for climate change, central banks and financial sector regulators/supervisors were going to become the major stakeholders because financial institutions play a key role in intermediation and hence had a more direct role in addressing climate change; and climate change was impacting the achievement of their mandates of price and financial stability.

So in December 2007, the Reserve Bank mandated “Corporate Social Responsibility, Sustainable Development and Non- financial Reporting – Role of Banks” highlighting the importance of global warming and climate change in the context of sustainable development.

In 2015, loans for generation of renewable energy and public utilities run on non-conventional energy were made part of directed priority sector lending by banks and in April 2021, the RBI joined the Network for Greening the Financial System (NGFS) to benefit from and contribute to the best practices in climate risk management and green finance.

He said in January 2022, the RBI conducted a Survey on Climate Risk and Sustainable Finance to assess the status of climate risk and sustainable finance in leading scheduled commercial banks and in January-February 2023, it issued sovereign green bonds worth $2.2 billion (₹16,000 crore) in two tranches to mobilise resources for the Government for green infrastructural investments.

Besides this in April 2023, the RBI introduced a “Framework for Acceptance of Green Deposits” from June 1, 2023, so as to address climate issues. 

Stating that though central banks generally pursued a relatively narrow mandate focused on stability and climate change was certainly not a part of it, at least till now, he said yet as more evidence accumulated that climate change was overwhelming the earth due to human activity, they cannot remain silent spectators. 

“So, in the RBI we began from scratch and immersed ourselves in the economics of climate change. Uncharacteristically, we pooled all that we could gather on the climate and put it into our flagship publication, The Report on Currency and Finance. This is our small contribution towards a greener, cleaner India,” he said. 

“To conclude, climate change threatens to overwhelm the earth, but we can reverse it because we have induced it. The time to act is now on several fronts. Development and climate change are not necessarily pitted in a trade off – sustainable development is key. The climate is a global public good – global action is needed for humanity to live in harmony with our planet. And it is in our hands,” he said