{"id":185233,"date":"2022-05-18T20:53:18","date_gmt":"2022-05-18T15:23:18","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=185233"},"modified":"2022-05-18T20:54:31","modified_gmt":"2022-05-18T15:24:31","slug":"needed-an-economic-response-plan-for-a-green-transition-shock","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/needed-an-economic-response-plan-for-a-green-transition-shock\/","title":{"rendered":"Needed: An economic response plan for a green transition shock\u00a0"},"content":{"rendered":"\n

News<\/strong>: India is facing severe heat waves in many parts of the country. This is a reminder that the risks from climate change are rising.\u00a0<\/span>\u00a0<\/span><\/p>\n

What are the issues involved in transition towards a green economy?<\/span><\/b>\u00a0<\/span><\/h5>\n

Around a <\/span>fifth<\/span><\/b> of Indian households have access to either <\/span>air-conditioners<\/span><\/b> or <\/span>coolers<\/span><\/b> in their home. Nearly half of the <\/span>Indian labour force<\/span><\/b> works <\/span>outdoors<\/span><\/b> in the sun during heat waves month.\u00a0<\/span>\u00a0<\/span><\/p>\n

This excess heat will have an impact on India\u2019s wheat crop. This can lead to other <\/span>supply shocks<\/span><\/b> in the coming years<\/span>\u00a0<\/span><\/p>\n

The <\/span>existing capital stock <\/span><\/b>in several sectors such as <\/span>energy<\/span><\/b> or <\/span>mobility<\/span><\/b> will become prematurely obsolete because of the government\u2019s tax policy or regulations that seek to reduce carbon emissions to mitigate climate events.<\/span>\u00a0<\/span><\/p>\n

The debate on how the costs (based on discount rate) should be borne to tackle climate change should be spread over time<\/span><\/b>\u00a0<\/span>\u00a0<\/span><\/p>\n

If a <\/span>lower discount rate<\/span><\/b> is imposed. It means today\u2019s generation bears a bigger burden of the costs.\u00a0<\/span>\u00a0<\/span><\/p>\n

If a higher discount rate is imposed, It means that the costs of mitigation can be pushed further into the future for coming generations to pay.<\/span>\u00a0<\/span><\/p>\n

The \u2018<\/span>green interest<\/span><\/b> rate\u2019<\/span><\/b> refers to how the <\/span>welfare of future generations<\/span><\/b> is to be treated while decisions are made today. <\/span><\/p>\n

–<\/strong> Frank Ramsey developed <\/span>a mathematical framework<\/span><\/b> for a proportion a nation should optimally save from its income. His insights have been used for a range of other applications, including climate change computations. He insisted that <\/span>the well-being<\/span><\/b> of future people should be given the<\/span> same weight<\/span><\/b> as that of present people.\u00a0<\/span>\u00a0<\/span><\/p>\n

What are the challenges?<\/span><\/b>\u00a0<\/span><\/h5>\n

The climate scientists have shown that the <\/span>window available<\/span><\/b> for serious action is closing by the year.<\/span>\u00a0<\/span><\/p>\n

A green transition can only be achieved over time. Any sudden action will almost certainly lead to<\/span> economic collapse<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

The costs of the transition will be spread over multiple generations, as most commitments to reach <\/span>carbon neutrality<\/span><\/b> are between 2050 and 2070. The challenges are how to distribute the costs (discount rate) over time, or who will bear than burden, i.e., present or future generation?<\/span>\u00a0<\/span><\/p>\n

There is a different viewpoint on discount rates<\/strong>. For example, <\/span>Nicholas Stern<\/span><\/b> argued for a discount rate of 1.4%. <\/span>William Nordhaus<\/span><\/b> (the Nobel Prize Winner for economics in 2018), has argued for 4.3% in his model. He argued that the <\/span>discount rat<\/span><\/b>e should be based on actual observed behaviour, and especially real interest rates in financial markets. On the contrary, <\/span>Stern<\/span><\/b> used a discount rate which was derived broadly on <\/span>ethical considerations<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n

The green transition will involve a supply shock that will reduce potential growth.\u00a0<\/span>\u00a0<\/span><\/p>\n

Over the next decade, the <\/span>fiscal policy<\/span><\/b> will be <\/span>constrained<\/span><\/b> because the <\/span>public debt<\/span><\/b> across the world had bloated because of government spending during the pandemic. Therefore, the green investments will be a political and economic challenge.<\/span>\u00a0<\/span><\/p>\n

Way Forward<\/span><\/b>\u00a0<\/span><\/h5>\n

The green transition will open up <\/span>opportunities<\/span><\/b> in new technologies, better infrastructure and the redesign of cities.\u00a0<\/span>\u00a0<\/span><\/p>\n

In the coming future, there should be <\/span>significant reallocation <\/span><\/b>of both capital as well as labour, assuming factor markets are flexible.\u00a0<\/span>\u00a0<\/span><\/p>\n

In addition to fiscal policy, the central banks will have a <\/span>dilemma<\/span><\/b> about whether they should add climate change mitigation to the policy targets to address inflation, growth and financial stability.\u00a0<\/span>\u00a0<\/span><\/p>\n

The <\/span>fiscal authorities<\/span><\/b> as well as<\/span> central banks <\/span><\/b>should maintain <\/span>low interest rates<\/span><\/b> to help new investments in a green economy. It will effectively make it easier for enterprises with older technologies to survive. The higher interest rates will kill polluting enterprises and make investments in new technologies more expensive.\u00a0<\/span>\u00a0<\/span><\/p>\n

The central banks can also choose <\/span>one interest rate<\/span><\/b> for green activities and <\/span>another one<\/span><\/b> for brown activities. This will lead to credit planning.\u00a0<\/span>\u00a0<\/span><\/p>\n

Much depends on how a <\/span>society<\/span><\/b> either <\/span>values<\/span><\/b> or should <\/span>value benefits<\/span><\/b> that will be available only many years down the line.\u00a0<\/span>\u00a0<\/span><\/p>\n

Source<\/span><\/b>: The post is based on an article \u201cAn economic response plan for a green transition shock<\/strong>\u201d published in the Live Mint<\/strong> on 18<\/strong><\/span>th<\/strong> May 2022<\/strong>.<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

News: India is facing severe heat waves in many parts of the country. This is a reminder that the risks from climate change are rising.\u00a0\u00a0 What are the issues involved in transition towards a green economy?\u00a0 Around a fifth of Indian households have access to either air-conditioners or coolers in their home. Nearly half of… Continue reading Needed: An economic response plan for a green transition shock\u00a0<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10501],"class_list":["post-185233","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-live-mint","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":1700807378,"cached_date":1704870458},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/185233","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=185233"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/185233\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=185233"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=185233"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=185233"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}