The latest UNEP’s Emissions Gap Report has projected the growth of 3% in greenhouse gas emissions by 2030 considering existing measures. Before celebrating this positive outlook, it is important to note that to attain global average temperature increases of 2°C and 1.5°C, the greenhouse gas emissions for the year 2030 must be reduced by 28% and 42% respectively. The present strategies, as indicated by the nationally specified contributions, are positioning us on a trajectory towards a temperature range of 2.4°C–2.6°C by the end of 21st century. Hence, despite the extensive mitigation measures, it is projected that the world climate will persistently experience transformations. Empirical data indicates that there exists a positive correlation between economic development and climatic vulnerability, with the latter serving as a catalyst for economic development. Undoubtedly, emerging and low-income nations exhibit a higher susceptibility to climate-related hazards compared to advanced nations. This observation implies that although climate change adaptation is crucial for all countries, it is particularly imperative for emerging and developing countries. Although there is a positive association between decreased climate vulnerability and economic development, the Adaptation Gap Report 2023 by the United Nations Environment Program (UNEP) emphasizes that advancements in adaptation are decelerating in terms of finance, planning, and implementation.
Between 2015 and 2022, the Asia and Pacific region experienced a significant increase in losses resulting from climate-related natural disasters, amounting to $400 billion, impacting a staggering 800 million individuals. In the given environment, it is of utmost importance to prioritize the mobilization of domestic resources and the implementation of fiscal policies in order to address the adaptation funding gap and foster the development of climate resilient businesses and societies. In this connection, fiscal policies encompass a wide array of instruments and measures, ranging from government expenditures to directly prioritize adaptation initiatives, to taxation, which motivates important stakeholders to endorse adaptation plans. Nevertheless, the fiscal capacity in the Asia-Pacific region is limited due to the presence of more arduous borrowing circumstances in different countries.
The integration of climate change into the fundamental framework of fiscal policymaking is important. The magnitude of the required investments is such that incorporating climate change adaptation into fiscal policy cannot be a straightforward addition. For establishing fiscal flexibility, it is imperative to integrate climate change into the mainstream through certain measures:
- The enhancement of fiscal risk assessment entails the identification, evaluation, and communication of the influence of climate and disaster risks on fiscal sustainability through macroeconomic shocks, implicit and explicit liabilities, adaptation needs and public services. For instance, the Philippines releases a yearly fiscal risk statement that encompasses a segment pertaining to the ramifications of climate-related calamities and alludes to continuous funding and management endeavours aimed at mitigating these effects. Policy makers ought to perform comprehensive evaluations of climate and catastrophe risks across several hazards to analyze the mean yearly damages caused by disasters, particularly those exacerbated by climate change.
- Enhancing fiscal risk management can enhance risk assignment, which in turn, facilitates the implementation of targeted investments to effectively manage climate and disaster-related fiscal risks. This can be achieved through improved preparedness, risk reduction, and risk transfer. Bangladesh, Indonesia, and Nepal have implemented climate budgeting systems to effectively categorize investments connected to climate change. The integration of climate risk management into public investment management systems is crucial for policy makers to effectively identify, align, and prioritize investments in climate action.
- For increasing the mobilization of domestic resources and harness private money for climate action, it is imperative to optimize resource allocation, finance, and investment through fiscal policies. This encompasses widely recognized mechanisms, such as the implementation of carbon taxation to produce income for the purpose of financing investments in low-carbon and climate-resilient endeavours, the gradual elimination of subsidies that bolster fossil fuel industries, and the restructuring of sovereign funds. For instance. Green bonds can be launched.
These measures can be enhanced by employing novel approaches to generate fiscal capacity, such as the utilization of resilient bonds to secure financial resources for climate-related investments; the establishment of special purpose vehicles to consolidate funds from various sources to facilitate private investment in adaptation efforts, encompassing the mitigation of risks associated with private investments in climate action and the provision of concessional capital; and the implementation of debt-for-climate or debt-for-nature instruments to facilitate investments in climate-related initiatives. For instance, Philippines has made efforts to mobilize resources and encourage strategic initiatives, resulting in the establishment of a focused financial mechanism known as the People’s Survival Fund.
Policy makers should consider a diverse array of instruments to foster the development of climate-adapted economies using a systematic strategy considering the following areas of intervention, as outlined by the International Monetary Fund:
- Allocating resources for providing financial support for modifications that yield positive externalities. The importance of selectivity cannot be overstated, as it is justified by the under-investment of private actors in adaptation solutions. Relevant examples include infrastructure investment, early warning systems, and research and development that assist the development of novel adaption technologies.
- The elimination of obstacles to private investment. This category of action encompasses the elimination of both financial and nonfinancial obstacles to private investment, such as subsidies that are unproductive. It also involves the establishment of frameworks for carbon pricing, the promotion of knowledge generation and distribution, and the enhancement of capacity for climate risk and adaptation solutions.
- Designing policies for the redistribution of resources. Addressing equity challenges that arise from climate change or adaptation policy itself is of utmost importance. To address the issue of a population leaving an area susceptible to sea level rise due to the creation of a new local urban plan, it is crucial to establish a comprehensive and equitable compensation plan.
After identifying the specific domains where actions are needed at the national level, cost-benefit assessment methods can be used to evaluate climate resilience measures. This analysis focuses on the distributional effects to optimize the consumption effectiveness while considering societal preferences and risk aversion, while also ensuring productivity and fairness.
Dr. Ishika Jaiswal is an Assistant Professor in Economics at the Indian Institute of Management (IIM) Sambalpur. She holds her Doctorate in Applied Economics from the University of Lucknow. Before that, she did her Post-Graduation (Applied Economics) and Graduation (Economics) from the same institution. She has also qualified UGC JRF in Economics in 2018. Her research areas include Demography and Population Studies, Growth and Development and Emerging Issues in Indian Economy. She has co-authored a textbook titled “Indian Economy” as well as authored a research book titled “Demographic Transition in Major Indian States”. She actively publishes research papers in several national and international journals and has presented her work in various conferences and doctoral colloquiums at reputed institutions like IISc Bengaluru, IBS Hyderabad, IIM Nagpur and alike. She has presented papers at international conferences, as well, in India’s neighbouring nations like Nepal and Bangladesh. She is also associated with several reputed journals as a reviewer.
