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Climate Change and Macroeconomic Policy
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Prof. Dr. Miranda S. Goeltom Senior Deputy Governor of Bank Indonesia
Abstract
This paper describes briefly the complexity of problems as well as efforts to mitigate the negative impacts of climate change on the economy from the perspective of macroeconomic
policies in emerging countries. The paper argues that the issue of climate change emerges due to imbalances in the structure of global economic development. These imbalances might bring
about the risk on global economic growth, higher inflation pressure and financial market vulnerability. Various studies show that the global economy may face a downturn due to
increasing pressure stemming from global climate change. A key aspect of the risks posed by climate change
is the damage associated with severe weather events, whose frequency and severity is likely to increase. Against this unfavorable backdrop, several policy implications
could be explored from both global and Indonesian perspectives. In this regards, there is a fundamental thought need to be considered; emphasizing that the policies should be integrated
in different sectors and not be instituted to sacrifice the achievement of long-term social welfare
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All countries need to agree that climate change and development goals can and should be pursued jointly; they are not mutually exclusive. International frameworks should recognize the
right of nations to increase their living standards, and the common but differentiated responsibilities of developed and developing countries in mitigating the effects of climate
change. For this, countries need to pursue effective mitigation at the lowest cost. In this regard, not only unequivocal political leadership of developed countries, but also strong commitment
from all countries to prove engagement on climate change, is amongst the fundamental pillars to promote global welfare.
I. IN TRO D U CTIO N
The climate change phenomenon has caught the attention of people all around the world recently. Advancements in research and broader knowledge concerning
climate change has unquestionably demonstrated the existence, and to some extent the effects, of global warming in recent times, possibly attributable to the activities of
humans with indifference and disregard for the environment, manifested among others in the extensive burning of fossil fuels as well as the widespread misuse of agricultural
land. Global warming will be responsible for grave consequences in the near future affecting all aspects of our lives and costing untold amounts of money.
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Presented at the Bank Indonesia International Seminar on “Macroeconomic Impact of Climate Change: Opportunities and Challenges”, held in Bali, 1-2 July 2008.
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From a micro perspective, there are an abundance of factors affecting the earth’s climate. The primary influence on our climate certainly stems from the sun’s energy.
In addition, a build up of greenhouse and aerosol gases in the atmosphere as well as the specific characteristics of the earth’s surface, which controls how much of the sun’s
energy is retained or reflected back into the atmosphere, can also affect the earth’s climate. The concentration of greenhouse gases in the atmosphere, such as
carbondioxide CO2, methane CH4 and nitrogen oxide N2O has increased significantly since the beginning of industrial revolution. With increasing greenhouse
emissions, the impact of global warming becomes alarming, both in terms of environmental destruction as well as economic consequences.
Various observations conducted by scientists have shown that air and sea temperatures have risen, the ice caps are melting more and more, and the sea level is
rising. An IPCC 2007 report said that from the twelve hottest years recorded since 1850, eleven occurred from 1995-2006. Furthermore, in the past 100 years 1906-
2005 the average global temperature has risen by as much as 0.74 C. To compound
matters further, the average global sea level rose 17 cm during the 20th Century, principally due to the melting of mountain ice and snow as well as the polar ice caps.
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The costs involved in mitigating climate change rely on a plethora of factors, including how fast the global economy is growing in the long term and how fast
technological breakthroughs can produce lower greenhouse gas emissions that can be applied to the global economy. A recent report stated that “climate change might cost
the global economy 9.6 trillion USD by 2100. A rise of just 2 to 3 degrees Celsius in the average world temperature could devastate food crops and shave 3 off global
economic output.” Stern, 2006. The problems do not stop here. Deteriorating environmental conditions have
been exacerbated by the concomitant rise of emerging and developing economies, that have driven up demand for energy for cooling and economic activities, most of which
is still sourced from fossil fuels. Against this inauspicious backdrop, carbon emissions produced in the drive to support the global economy have continued to aggravate the
global climate. There are two basic complications.
Firstly
, new, innovative technologies that are expected to produce lower greenhouse emissions still face
constraints to their mass adoption due to the exorbitant prices involved for such technology. Consequently, such technologies are less competitive.
Second
, strong
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Changes in regional levels have also been observed. For instance, changes in ice and arctic temperatures, sea salinity, wind patterns, drought, rainfall, warm wave frequency and the intensity of
tropical cyclones.
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demand for fossil fuels has pushed up the price of world crude oil and gas. As an illustration, in mid 2008, the global price of crude oil was USD 140barrel, whereas
just six months previously the price was around USD 70-80barrel. The high price of fossil fuels and the need to curtail its use have encouraged
developed countries to institute economic policy to promote alternative energy, so- called biofuels. The other macroeconomic consequences of this policy are very
significant. Biofuel, which is derived from vegetable products such as beans and vegetable oils has raised food prices. Put another way, competition has emerged
between the food requirement and meeting the alternative energy needs stipulated by government policy. With food supply not expanding to meet additional demand, food
prices continue to spiral. This will become a serious issues for the global economy, in particular developing countries, where inflation caused by rising food prices will have
direct adverse impacts on people with low, fixed incomes. With most of their income allocated for food, any hike in food prices would detrimentally affect their already
difficult lives. Sporadically, cases of malnutrition have been found in families due to their inability to fulfill their nutritional needs.
So far it is clear that climate change not only destroys the environment, but also the economy. This paper will describe briefly the complexity of problems as well as
efforts to mitigate the negative impacts of climate change on the economy from the perspective of macroeconomic policies in emerging countries. Following this
introduction, the subsequent two chapters will explain the relationship between economic development imbalances and climate change as well as the macroeconomic
impacts of climate change. Prior to the conclusion, several economic policy implications from both global and indonesian perspectives will be elaborated.
II. ECO N O M IC D EVELO PM EN T IM BALAN CES AN D CLIM ATE CH AN GE
