Governments may be the most influential agency to address the climate change issue, but central banks and other financial sector regulators are also stakeholders in it as their mandates of financial and price stability could be impacted by deteriorating environment, Reserve Bank of India (RBI) deputy governor Michael Patra said.
“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. Physical and transition risks can affect the balance sheets of financial institutions and banks, limiting the flow of credit to the real economy,” Patra said in a speech at the New York Fed Central Banking Seminar organised by the Federal Reserve Bank, New York.
Patra acknowledged that though central banks generally pursue a relatively narrow mandate focused on stability without climate change being a part of it. But as evidence accumulates that climate change is overwhelmingly due to human activity, central banks cannot just remain silent spectators.
“There is a growing recognition that even if governments are the most influential agency for climate change, central banks and financial sector regulators/supervisors are going to become the major stakeholders because (1) financial institutions play a key role in intermediation and hence have a more direct role in addressing climate change; and (2) climate change is impacting the achievement of their mandates of price and financial stability,” he said.
Patra said that energy production drives around three-quarters of global green house gas emissions. In India fossil fuel-based energy sources, like coal, oil and natural gas continue to dominate energy consumption in India with the share of coal in India’s electricity production is around 70%.
“Costs involved in the policy responses for adaptation to and mitigation of climate change related challenges are unprecedented,” Patra said.
Patra pointed out that by July 2023, installed capacity of renewable energy (including hydro ) in India stood at 177 giga watts (GW), accounting for 42% of total installed capacity, but renewable energy accounts for only 27.2% of total generation.
India’s clean energy target is 500 GW by 2030 with under construction capacity of around 80 GW, taking the total available capacity to about 250 GW. In other words India needs to add 25 GW of renewable energy capacity annually for the next eight years, which would involve an investment of $15 to $16 billion (Rs 1.25 lakh crore) with renewable energy installed capacity growing at 16.4%.
“Central banks generally pursue a relatively narrow mandate focused on stability. Climate change is certainly not a part of it. At least till now. Yet as more evidence accumulates that climate change is overwhelming the earth due to human activity, we cannot remain silent spectators,” Patra said.
