8
The time has now come to rethink our priorities. Deforestation mainly in tropical areas accounts for up to one-third of total carbon dioxide emissions. It is a
clear-cut contradiction to the nature of developing and using of biofuels due to the subsequent rise in crop prices but with a very limited effect on reducing greenhouse
emissions and nearly no impact on moderating conventional fuel prices.
III. M ACRO ECO N O M IC IM PACTS O F CLIM ATE CH AN GE
Current global economic performance provides an early warning of climate change impact. Sluggish economic growth, spiraling inflation and uncertainty in
financial markets are inseparable from the impact of global climate change; directly and indirectly. The impact of record-high oil prices and the ongoing impact on
escalating food commodity prices amidst a range of natural disasters in different parts of the world have undermined the global economy.
Various studies show that the global economy may face a downturn due to increasing pressure stemming from global climate change. This mainly relates to
corrections by economic players because of the impact of increasing GHG emissions. The IMF 2008 has indicated that GHG emissions will continue to surge following the
impact of GDP per capita growth and the burgeoning world population, despite greater energy intensity actually reducing GHG emissions slightly Chart 9. However, different
adjustments made following the impacts of climate change could lead to differing results, across sectors, countries and regions.
Chart 9. Carbon Dioxide Energy-Related Emission
Source: WEO April 208, IMF
The impact of climate change on the macro economy can be felt through both the supply and demand sides, however the supply side is the trigger of the overall
impact. IMF 2008 argues that climate change can be categorized as a series of persistent and potentially abrupt sector-specific supply shocks. These negative supply
shocks relate to decreasing economic productivity, higher temperatures, changing rain
9
patterns and air pressure. Such conditions will directly influence agriculture, plantations and forestry as well as tourism. Under such circumstances that climate
change precipitates natural disasters, productivity will also decline. The effect will be compounded further if intangible issues, such as health and nutritional quality suffer
due to the calamity. The contribution of climate change from the supply side could be bigger, if concomitantly, there is population migration to avoid the risks of climate
change. Migration could also have significant impacts on overall economic productivity.
On the other hand, climate change may trigger demand shocks IMF, 2008. Energy consumption is increasing to meet the requirement for air conditioning. At the
same time, stronger demand for alternative commodities could also intensify to mitigate the rise in energy commodity prices. This demand shock is also possible if
governments respond by increasing spending to minimize the impact of climate change. However, in the mid term, with a lack of budgetary resources, government
stimuli in the economy, in particular stimulating economic productivity, will decrease due to budgetary constraints.
In general, climate change will dent global economic growth due to this dominant
supply shock. The IMF literature survey 2008, demonstrates that global economic
growth will decline in the mid-long term. Three references regarding the impacts of
climate change Mendelson and others, 2002; Nordhaus and Boyer, 2000; Tol, 2002 and
the Stern Review 2007, have assessed that GDP will decline by between 0 and 3 for
every 3
o
C of global warming from 1990-2000 levels Chart 10. IMF 2008 has
acknowledged that the decline in global economic growth could surpass existing estimations. This is possible if the evaluation
includes intangible conditions such as health due to poor water quality, the spread of disease and air pollution.
Nordhaus and Boyer 2000 show that the impact of climate change is likely to vary across countries, depending on their vulnerability to climate change and ability to
adapt to its effects. Declining economic growth in countries with temperate climates will be of relatively less magnitude than that experienced in warmer climate. The
differing initial climates in each region will determine the magnitude of the impact of
Chart 10. Mean GDP Losses at Various Levels of Warming
10
10 20
30 40
50 60
70
Ge rm
a n
y UK
US F
ranc e
Ita ly
C anada
Ja p
a n
Ko re
a UA
E Is
ra e
l Br
a z
il M
e xi
co H
ungar y
S ingapo
re S
o ut
h A fri
c a
Ta iw
a n
HK S
A R
Ch ile
P ol
and Tu
rk e
y A
rgen tina
M a
la y
s ia
Ch in
a S
a udi
A rabi
a T
hai la
nd Ind
ones ia
Eg yp
t Ru
s s
ia V
ie tnam
P h
ilippi nes
Indi a
Uk ra
in e
Weight of Food Component within CPI
climate change on economic productivity and growth. Based on region, several studies foresee that developing countries will be influenced first and, cumulatively, will suffer
the most compared to developed countries. Africa, South and Southeast Asia especially India, Latin America and OECD Europe are predicted to face more
pressures than other countries Chart 11. In addition, climate change could also deteriorate the poverty level. In line with the findings on inter-regional impacts, Cline
2007 and Yohe and others 2007 predict that Africa and Asia are particularly vulnerable in terms of the physical impacts of climate change. In these regions, almost
1 billion people may experience water shortages by 2080, more than 9 million could fall victim to coastal floods, and many more could face hunger.
Chart 11. Impact of Warming by Region and Sector
Source: WEO April 208, IMF
The strong impact of supply shocks followed by increasing demand will intensify global inflationary pressures. Inflationary pressures in the medium term are
dominantly influenced by declines in the supply of goods and services with a decline in aggregate productivity IMF, 2008. Food prices will skyrocket if there is a harvest
failure due to climate change or natural disaster. Inflation will rise if demand for energy and alternative commodities as well as food commodities strengthens. Pressures will
intensify further if the services sector, such as the health sector, raises its service fees due to increased demand.
Recent performance has indicated that food price
inflation is a much more significant issue in emerging
markets compared to developed markets. This
corresponds to the greater weight of food within the
Chart 12. W eight of Food Component within CPI
Source: National Statistical Sources
11
2 4
6 8
10 12
14
00 01
02 03
04 05
06 07
Core: Non Food , yoy Core: Food , yoy
Core Inflation , yoy
consumer price basket in emerging countries Chart 12. Subsequently, higher inflation attributable to soaring commodity prices will raise inflation expectations and trigger
inflationary pressures on other products second-round effects. The second-round effect of commodity price hikes has been the rise in core inflation, particularly in
developing countries since mid 2007 Chart 13. Increasing core inflation has comprehensively intensified global inflationary pressures since mid 2007 Chart 14.
Chart 13. Global Core Inflation Chart 14. Global Headline Inflation
UK Canada
US EU
Japan Thailand
China Korea
Indonesia Phillipine
-1 1
2 3
4 5
6 7
8 9
J a
n- 05
Ap r-
5 Ju
l- 5
Oct -05
J a
n- 06
Ap r-
6 Ju
l- 6
Oct -06
J a
n- 07
Ap r-
7 Ju
l- 7
Oct -07
J a
n- 08
Ap r-
8 Fe
b- 05
May -0
5 A
ug- 5
No v
-0 5
Fe b-
06 May
-0 6
A ug-
6 No
v -0
6 Fe
b- 07
May -0
7 A
ug- 7
No v
-0 7
Fe b-
08 May
-0 8
-1 1
2 3
4 5
6 7
8 9
yoy yoy
Left Hand Scale Advance Countries
Right Hand Scale Regional Countries
70 90
110 130
150 170
190
2003 2004
2005 2006
2007 2008
1.0 1.5
2.0 2.5
3.0 3.5
4.0 4.5
Non Fuel Comm. Price World Inflation rhs
Index, 2005 = 100 Inflation yoy
Source: Bloomberg Source: Bloomberg
In the case of Indonesia, the impact of commodity price shocks on inflation will be transmitted through both energy and food commodity prices. The spike in the oil
price inevitably induced higher inflation through unsubsidized domestic fuel prices. Our preliminary estimations show that oil price elasticity to CPI inflation is around
0.04. This elasticity is an accumulation of the first and second-round effect of oil price shocks. The impact of the soaring oil price on inflation is more severe when the
government cuts its fuel subsidy, as occurred in 2005 125 and May 2008 28.7
5
. Meanwhile the spike in global
commodity prices will generate higher inflation both through volatility and core
inflation Chart 15. The effect of food prices on core inflation does not only
correspond to food and beverages, but will also be transmitted as second-round
effects to other commodities. In general, the response of core inflation to global
commodity shocks is triggered by
5
Inflation in 2005 soared to 17.1 from 6.4 in 2004, while in inflation in 2008 is predicted to reach around 12.
Chart 15. Indonesia Core Inflation
Source: Indonesia Central Statistic
12
increasing inflation expectations as a result of the rising oil price, which play a dominant role in Indonesia’s case.
The slowing down economic growth and inflation pressure potentially deteriorates the fiscal performance. Fiscal deficit could arise due to the weakening of
conventional tax base andor the rise of the expenditure on some item to mitigate as well as to adapt of the risk of climate change. IMF 2007 argued the higher fiscal
deficit correspond to the climate change plausibly emerge from the effort to mitigate carbon emission, including higher energy prices and increased investment, as well as
the measures to lessen the impact of the climate change both direct and indirect to the poor. Some countries apply this policy by multiply the subsidy and hence enhance the
fiscal deficit. For the case of Indonesia, the Government implemented the Compensating Program, by providing direct cash support and food assistance programs
to the 40 percent lower income group. The prospect of an economic slowdown and increasing inflation risk will
subsequently increase global uncertainties. Such global uncertainties will, in turn, leave financial market performance quite vulnerable. With increased liquidity and
financial market innovations, the changing risks associated with climate change will easily be transmitted to global financial markets, which will eventually place pressure
on the goods market. IMF 2008 has shown that risk premia and the global cost of capital may rise as output and inflation uncertainty increase owing to greater intensity
and frequency of extreme weather events and increased weather variability.
IV. PO LICY IM PLICATIO N S AN D RESPO N SES
