Leonardo Badea, PhD: Perspectives of economic development considering the climate change imperatives

Climate change is a huge challenge for humanity to adopt a new style of sustainable development and also a big opportunity to shape the society of the future based on more balanced and inclusive growth. This is more than a choice, it is our duty to future generations.

By Leonardo Badea, Deputy Governor National Bank of Romania

Unfortunately, even if we act very fast to curb CO₂ emissions and all other forms of pollution that augment the greenhouse effects, it will probably not be fast enough to reverse the disruptions that we have already caused our planet. This implies that some of the negative effects on the environment would probably not diminish but rather increase for many years to come. They are already inducing important changes in the functioning of most economies all over the globe.

Even if we are already aware of the impact of these changes on our everyday routines, we can only imagine a small part of the long term transformations induced in the way we work, how we live, or our family finances (from health expenses to the cost of groceries, utilities, travel and leisure, etc.). If people could fully understand the huge financial costs that they will have to individually bear in the future (not very far) as the result of the climate impact on the overall economic activities, they would probably understand better how small is the effort that they need to make today in order to recycle and to reduce pollution.

For some years now, economists have been discussing the risks of climate change at the macroeconomic level having in mind two perspectives: physical risks and transition risks. Also, at least over the last decade, they have shown that weather matters for social and economic outcomes (Dell et al. 2014, Carleton and Hsiang 2016). Unfortunately, most of these risks have already become plain realities and not probable events. We are already facing huge economic losses from disasters caused by the gradual warming, floods, sea level increases, high frequency, severity, and correlation of extreme weather events. The losses are either in the form of damages to property, infrastructure or crops, illnesses, injuries and casualties, trade disruptions and falling productivity, or mass human migration and security threats (Swiss Re Institute, 2021). At the same time, the efforts to reduce the pollution generated by economic activities increased costs for businesses and consumers and in some cases even made entire organizations or products/activities unfeasible with a negative impact on jobs in those particular areas.

Inflationary pressures might arise from a decline in the national and international supply of commodities or productivity shocks caused by weather-related events (Batten, Sowerbutts and Tanaka, 2020). Based on current developments, we can anticipate that agricultural products could become more expensive in the future because of the negative implications of climate on crop and livestock productivity if we do not manage to curb pollution and invest significantly in better (digitally enabled) technologies. Producing cost of utilities (especially energy, water, and sewage) will probably increase to incorporate the rising expenses from reducing the footprint on the environment). Packaging and transportation costs for wide categories of groceries, consumer staples and durable goods are also expected to rise as a result of using more environmentally friendly but also more costly materials, technologies, and energy sources. The same impact will probably be visible on travel costs.

At the same time, weather events induced by climate changes can potentially result in large financial losses, lower wealth, and lower GDP. Rising sea levels and temperatures, droughts (and associated fires), floods, and storms will reduce tourism in areas that are economically dependent on income from related activities. Quality of life in some dense urban centers may suffer, thus determining people to move to other areas, with a negative impact on some categories of businesses and jobs in the services sector and real estate from those urban areas. The overall negative impact on economic growth and purchasing power may lead to further increases in inequalities and social tensions.

According to a report published by British charity Oxfam (2021), the world’s seven richest countries may lose trillions each year during the next three decades because of the catastrophic results of climate change, while the impact on poorer countries could be even more significant. At the same time, the World Bank (2021) estimates that an additional 132 million people worldwide could be driven into extreme poverty until 2030 as a result of climate change. The challenges associated with climate change are intensifying in low- to middle-income countries due to poverty, inadequate development, and high dependence on natural resources (Rogelj et al., 2016).

The effects of climate change on people are often more pronounced in areas and among populations that are already vulnerable. This is why combating climate change must be associated with measures to help the most vulnerable and to tackle other global challenges such as poverty and inequality.

However, at the same time, there is significant potential to develop green projects that will improve the structure and content of the world’s economies. According to the principles of responsible management, aiming for proper management of a business implies that we must meet the interests of all stakeholders: not only holders of capital but also employees, suppliers, customers, and last but not least, the local community.

There are at least seven main development areas that could help reduce the impact of our economic activities on the planet’s ecosystem:

The financing for green projects needs to benefit from advantageous conditions and in a combination of dedicated public funds and private issuance of bonds or other sources (bank credit, international organizations funding).
The infrastructure must undergo important changes, to adapt to the new requirements because in addition to the already known need to develop naval, road, air, and rail networks, certain vulnerabilities were highlighted by the Covid-19 pandemic. The transition to electrification of road transport also implies the development of power supply station networks.
The automotive industry should speed up the introduction of feasible and long autonomy electric models on a large scale. These new models are not yet responding to all consumers’ needs for accessibility, reliability, and especially autonomy.
There are several new clean industries based on digitalization and new technologies. We are already talking about a virtual ecosystem in which new services and products are being developed. However, these must observe tight standards for security and privacy.
National education systems and private organizations involved in educational activities for all categories of age and profession must continue to invest in changing the collective mindset. Although citizens are much more aware of the importance of protecting the environment and maintaining unpolluted habitats, this process needs to be accelerated and should also be supported more intensely by the work of international bodies with strategies, analyzes, and proposals to promote sustainable development and ecofriendly behavior of individuals, families, and communities.
The circular economy still offers many opportunities for sustainable development based on new models of organizing the economic activities with a minimal negative impact on the environment.
The health of the population is influenced by the level of climate change, possible spreads of contagious diseases, but also the safety of citizens as a result of the intensification of natural disasters. Therefore, healthcare and pharmaceutical remain one of the most important sectors where research and investment must continue at an accelerated level. National medical systems, as well as private networks of heath care providers, should continue to develop their services and increase accessibility both in terms of proximity and cost.

Lately, both international organizations and the civil society have been concerned with accelerating the adoption of measures to fight climate change.

One of the answers from the EU was to put climate change at the top of its political agenda through the European Green Pact published in December 2019 by European Commission President Ursula von der Leyen. The main goal of the European Green Pact is to make Europe the first climate-neutral continent by 2050. This recognizes the fact that the impact of climate change will become unmanageable if we as a society do not take immediate and decisive actions, including economic measures and regional plans for relief, which is already underway at EU level (The European Green Deal aims to make Europe the first neutral continent in terms of negative environmental impact by 2050).

Rethinking the subsidies for fossil fuel energy producers could play an important part in reducing the CO2 emissions. One way of dealing with this difficult issue (given its impact on large categories of vulnerable consumers) is to condition them on the effective implementation of transition plans for lowering the emissions in accordance with the 1.5 degree goal (Subran and Thallinger – World Economic Forum, 2021).

The fight to preserve a healthy environment for future generations has an important economic component as well. Measures to stimulate sustainable economic development by encouraging cleaner production, transportation, and distribution of goods and services, along with a lower tax for companies that reduce pollution are more necessary than ever. We are at a turning point in the transformation and development of the economy as a result of several catalytic factors, out of which the pandemic crisis is very important. We cannot truly understand today’s economy if we are unable to imagine the way it will probably look like tomorrow, and all our current actions need to be aimed at developing the world of the day after tomorrow. It is not easy, but it is of paramount importance!

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