ProdukHukum BankIndonesia
Climate Change and
Macroeconomic Policy
Prof.Dr. Miranda S. Goeltom
Senior Deputy Governor Bank Indonesia
Bank Indonesia International Seminar
Bali, 1 – 2 August 2008
2
Agenda…
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Introduction
On the climate change phenomenon ...
The activities with indifference and disregard for the environment?
Alarming, ... both in terms of environmental destruction as well as economic
consequences.
Impacts of deteriorating environmental conditions have been
exacerbated by the concomitant rise of emerging and developing
economies,
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, biofuels.
3
4
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Structure of Global Economic Development
Climate change corresponds closely to the strategy and structure
of global economic development
It creates imbalances in several aspects of the global economy.
i.
the growth of the physical economy vs development of the green economy;
ii. the pace of global economic development;
iii. the development strategies of various economic sectors.
Inefficacious strategy and the sub-optimal structure of global
economic development continue to accumulate and compound the
climate change problems experienced recently...
5
World Economic Growth vs Green Economy
The overarching influence of the prevailing attitude to prioritize
physical economic growth rather than maintain a balance with the
global green economy is clear from recent economic developments.
6
Reflected in the expansionary trend of the global economy during the last
decade.
But, CO2 emissions from
the combustion of fuel are
also mushrooming ...
Gross World Product, 1950-2007
60
40
30
20
10
20
05
20
01
19
97
19
93
19
89
19
85
19
81
19
77
0
19
73
Thus.... “current world
development structure
disregards environmental
sustainability ....”
19
65
trillion USD
50
Structure of World Economic Growth
The catalyst of such strong global economic growth is inseparable
from the robust economic development in developed countries
compared to developing countries.
The IMF (2007) has documented the contributions made by developed countries
to the reserves of CO2.
Rapid development in the global economy has generally always been
supported more by the industrial sector compared to other economic
sectors, such as agriculture and mining.
Source: WEO, Oct-2007, IMF
7
Prospect of Imbalances
The impact of imbalances in strategy support among economic
sectors on climate change has the potential to continue
8
particularly in light of current global economic problems; namely rising energy
prices.
The most notable endeavors taken to reduce dependence on oil are
through the promotion and use of alternative energy (or biofuels).
Oil Price
USD/barel
The trend of rising food
commodity prices aggravated
the problems associated with
climate change ...
160
140
120
100
80
60
40
20
0
Jun-87
Jun-90
Source: EIA
Jun-93
Jun-96
Jun-99
Jun-02
Jun-05
Jun-08
9
The Risk in Land Conversion
Another effect of sky-high
agricultural commodities that
requires closer attention is land
conversion into arable land
Causes of Tropical
Deforestation 2000-2005
Other
5%
Cattle Pasture
20-25 %
During the period of 2000-2005,
tropical deforestation was
attributable to small-holder
agriculture, large-scale
agriculture, logging and cattle
pasture ...
Large Scale
Agriculture
15-20 %
Logging
10-15%
Source: Mongabay.com
Small Holder
Agriculture
35 - 45 %
10
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Climate Change Impact
Current global economic performance provides an early warning of
climate change impact.
Global economy may face a downturn due to increasing pressure
stemming from global climate change.
11
Some indication that GHG emissions will continue to surge.
Carbon Dioxide Energy-Related Emission
However, different
adjustments may lead to
differing results, across
sectors, countries and
regions.
Source: WEO, April 08-IMF
Climate Change Impact: Economic Growth
Climate change dent global economic growth due to dominant supply
shock. Climate change may also trigger demand shocks.
The IMF literature survey (2008), demonstrates that global economic growth will
decline in the mid-long term.
The impact of climate change is likely to vary across countries,
depending on their vulnerability and adaptation to climate change.
Climate change could also deteriorate the poverty level.
Impact of Warming by Region and Sector
Source: WEO, April 08-IMF
12
Climate Change Impact: Inflation
13
The strong impact of supply shocks followed by increasing demand
will intensify global inflationary pressures.
Recent performance indicated 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 consumer price basket
in emerging countries
Weight of Food Component within CPI
Weight of Food Component within CPI (%)
70
60
50
40
30
20
10
0
Ukraine
India
Philippines
Vietnam
Russia
Egypt
Indonesia
Thailand
Saudi Arabia
China
Malaysia
Argentina
Turkey
Poland
Chile
HK SAR
Taiwan
South Africa
Singapore
Hungary
Mexico
Brazil
Israel
UAE
Korea
Japan
Canada
Italy
France
US
UK
Germany
14
Climate Change Impact on Inflation:
Case of Indonesia
The impact of commodity price shocks on inflation in Indonesia
transmitted through both energy and food commodity prices ...
Indonesia Core Inflation
Preliminary estimations show
that oil price elasticity to CPI
inflation is around 0.04.
The spike in global commodity
prices will generate higher
inflation both through volatility
and core inflation.
14
12
10
8
6
4
Core: Non Food (%, yoy)
Core: Food (%, yoy)
Core Inflation (%, yoy)
2
00
01
02
03
04
05
06
07
Climate Change Impact: Fiscal Deficit
The slowing down economic growth and inflation pressure potentially
deteriorates the fiscal performance.
Correspond to the weakening of tax base and/or the rise of the expenditure on
some item to mitigate as well as to adapt of the risk of climate change.
Some countries apply this policy by multiply the subsidy and hence enhance the
fiscal deficit.
For the case of Indonesia,
government implemented the
Compensating Program, by
providing direct cash support
and food assistance programs
to the 40 percent lower income
group.
15
16
Climate Change Impact: Financial Market
The prospect of an economic slowdown and increasing inflation risk
will subsequently increase the uncertainties on global financial market.
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
This will eventually place pressure on the goods market.
17
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Policy Implications
Fundamental thought ... that the policies should be integrated in
different sectors and not be instituted to sacrifice the achievement of
long-term social welfare.
From a global perspective, at least two issues to be resolved as a
priority;
How to minimize the effects of soaring international commodity prices and
how to mitigate the impacts on particular groups;
How to promote environmentally friendly economic policies .
Collective international action may be seen as key to support these
efforts across countries. But how far can they go?
From the Kyoto Protocol ...137 developing countries have ratified the
protocol, but have no obligation beyond monitoring and reporting emissions.
The US has not ratified the treaty...
From the Bali Action Plan.... sharp cuts in global emissions will be required
to achieve the ultimate objective of the Convention and emphasizing the
urgency to address climate change as indicated in the AR4 of the
Intergovernmental Panel on Climate Change.
18
Policy Implications
A winding road ahead ......
Several obstacles - OECD Environmental Outlook to 2030 (2008):
(i)
(ii)
Fears of adverse impacts on industrial competitiveness.
Uncertainty surrounding who should take action and who should bear the
costs of action; and
(iii) Under pricing of natural resource use and pollution, it is difficult,
practically, to accurately calculate the full costs of environmental, health,
and productivity damage caused by economic activities.
The central issue is the cost calculation and fair burden sharing for
every country in adaptation and climate change mitigation.
19
Policy Implications: Indonesian Perspectives
Policy in Banking and Financial Sector ...
Bank Indonesia (BI) aims its policy towards supporting the
protection of the environment by encouraging banks to invest in
businesses that serve to protect the environment.
Under the framework of risk-based supervision, BI urges banks to be
aware of their operational risks, especially related to lending
activities to finance projects that have direct or indirect effects on
the environment.
Within the financial stability framework, BI considers the
surveillance of bank lending for projects that could potentially
damage the environment as important.
Indonesia itself has not yet used hedging instruments against
weather and catastrophic risks; yet traditionally building financing
structure mechanisms to protect domestic economy from the price risks.
20
Policy Implications: Indonesian Perspectives
Monetary Policy ...
High inflation due to rising food and oil prices has caused
dilemmatic condition for economic growth in Indonesia.
Empirical fact indicates that for demand stimuli not to generate excessive
inflationary pressures, demand management policy must be complemented
by the mitigation of capacity constraints on the supply side .....
Inflation targeting, has helped to anchor inflation expectations
among economic agents...
Monetary policy must be vigilant towards any second-round
inflationary effects that show up in core inflation
Movement towards a more flexible exchange rate also provides
greater scope for effective and stable monetary policy action
21
Policy Implications: Indonesian Perspectives
Fiscal Policy ...
fiscal spending should be aimed to guide long term goals, especially
alleviating supply bottlenecks—particularly related to infrastructure—that
have contributed to inflation pressures.
Efforts to reduce the level of protectionism as well as subsidies aimed
at stimulating biofuels production and increasing energy conservation not only
would help to moderate the growth in energy demand, but also would remove
distortions and allow for greater efficiency.
Fiscal self-insurance against climate change, whereby government
budgets must include room for adaptation expenditures, and social
safety nets must be strengthened.
For the case of Indonesia, the ‘compensating program’ is expected to
shift the benefit subsidy from the higher income group to the lower
income group, thus improve income distribution.
22
Policy Implications: Indonesian Perspectives
Policy in the Real Sector ...
The treatment of this problem has to focus on improvements in
goods and services supply.
Any trade restrictions that could induce a more limited world food
supply amidst persistent strong demand should be short term in
nature and applicable only for good reason.
As a part of the strategic steps taken on the supply side to cope
with spiraling oil prices, the Government has increased its target for
biofuel consumption as part of it’s National Energy Blueprint.
23
24
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Concluding Remarks
Sharing integrated economic policies is expected to help mitigate
the negative effects.
It is necessary to have adequate safeguards to avoid any
detrimental environmental effects.
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.
Countries need to pursue effective mitigation at the lowest cost.
Not only unequivocal political leadership of developed countries,
but also strong commitment from all countries to prove engagement
on climate change, are amongst the fundamental pillars to promote
global welfare.
25
26
Thank You …
Macroeconomic Policy
Prof.Dr. Miranda S. Goeltom
Senior Deputy Governor Bank Indonesia
Bank Indonesia International Seminar
Bali, 1 – 2 August 2008
2
Agenda…
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Introduction
On the climate change phenomenon ...
The activities with indifference and disregard for the environment?
Alarming, ... both in terms of environmental destruction as well as economic
consequences.
Impacts of deteriorating environmental conditions have been
exacerbated by the concomitant rise of emerging and developing
economies,
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, biofuels.
3
4
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Structure of Global Economic Development
Climate change corresponds closely to the strategy and structure
of global economic development
It creates imbalances in several aspects of the global economy.
i.
the growth of the physical economy vs development of the green economy;
ii. the pace of global economic development;
iii. the development strategies of various economic sectors.
Inefficacious strategy and the sub-optimal structure of global
economic development continue to accumulate and compound the
climate change problems experienced recently...
5
World Economic Growth vs Green Economy
The overarching influence of the prevailing attitude to prioritize
physical economic growth rather than maintain a balance with the
global green economy is clear from recent economic developments.
6
Reflected in the expansionary trend of the global economy during the last
decade.
But, CO2 emissions from
the combustion of fuel are
also mushrooming ...
Gross World Product, 1950-2007
60
40
30
20
10
20
05
20
01
19
97
19
93
19
89
19
85
19
81
19
77
0
19
73
Thus.... “current world
development structure
disregards environmental
sustainability ....”
19
65
trillion USD
50
Structure of World Economic Growth
The catalyst of such strong global economic growth is inseparable
from the robust economic development in developed countries
compared to developing countries.
The IMF (2007) has documented the contributions made by developed countries
to the reserves of CO2.
Rapid development in the global economy has generally always been
supported more by the industrial sector compared to other economic
sectors, such as agriculture and mining.
Source: WEO, Oct-2007, IMF
7
Prospect of Imbalances
The impact of imbalances in strategy support among economic
sectors on climate change has the potential to continue
8
particularly in light of current global economic problems; namely rising energy
prices.
The most notable endeavors taken to reduce dependence on oil are
through the promotion and use of alternative energy (or biofuels).
Oil Price
USD/barel
The trend of rising food
commodity prices aggravated
the problems associated with
climate change ...
160
140
120
100
80
60
40
20
0
Jun-87
Jun-90
Source: EIA
Jun-93
Jun-96
Jun-99
Jun-02
Jun-05
Jun-08
9
The Risk in Land Conversion
Another effect of sky-high
agricultural commodities that
requires closer attention is land
conversion into arable land
Causes of Tropical
Deforestation 2000-2005
Other
5%
Cattle Pasture
20-25 %
During the period of 2000-2005,
tropical deforestation was
attributable to small-holder
agriculture, large-scale
agriculture, logging and cattle
pasture ...
Large Scale
Agriculture
15-20 %
Logging
10-15%
Source: Mongabay.com
Small Holder
Agriculture
35 - 45 %
10
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Climate Change Impact
Current global economic performance provides an early warning of
climate change impact.
Global economy may face a downturn due to increasing pressure
stemming from global climate change.
11
Some indication that GHG emissions will continue to surge.
Carbon Dioxide Energy-Related Emission
However, different
adjustments may lead to
differing results, across
sectors, countries and
regions.
Source: WEO, April 08-IMF
Climate Change Impact: Economic Growth
Climate change dent global economic growth due to dominant supply
shock. Climate change may also trigger demand shocks.
The IMF literature survey (2008), demonstrates that global economic growth will
decline in the mid-long term.
The impact of climate change is likely to vary across countries,
depending on their vulnerability and adaptation to climate change.
Climate change could also deteriorate the poverty level.
Impact of Warming by Region and Sector
Source: WEO, April 08-IMF
12
Climate Change Impact: Inflation
13
The strong impact of supply shocks followed by increasing demand
will intensify global inflationary pressures.
Recent performance indicated 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 consumer price basket
in emerging countries
Weight of Food Component within CPI
Weight of Food Component within CPI (%)
70
60
50
40
30
20
10
0
Ukraine
India
Philippines
Vietnam
Russia
Egypt
Indonesia
Thailand
Saudi Arabia
China
Malaysia
Argentina
Turkey
Poland
Chile
HK SAR
Taiwan
South Africa
Singapore
Hungary
Mexico
Brazil
Israel
UAE
Korea
Japan
Canada
Italy
France
US
UK
Germany
14
Climate Change Impact on Inflation:
Case of Indonesia
The impact of commodity price shocks on inflation in Indonesia
transmitted through both energy and food commodity prices ...
Indonesia Core Inflation
Preliminary estimations show
that oil price elasticity to CPI
inflation is around 0.04.
The spike in global commodity
prices will generate higher
inflation both through volatility
and core inflation.
14
12
10
8
6
4
Core: Non Food (%, yoy)
Core: Food (%, yoy)
Core Inflation (%, yoy)
2
00
01
02
03
04
05
06
07
Climate Change Impact: Fiscal Deficit
The slowing down economic growth and inflation pressure potentially
deteriorates the fiscal performance.
Correspond to the weakening of tax base and/or the rise of the expenditure on
some item to mitigate as well as to adapt of the risk of climate change.
Some countries apply this policy by multiply the subsidy and hence enhance the
fiscal deficit.
For the case of Indonesia,
government implemented the
Compensating Program, by
providing direct cash support
and food assistance programs
to the 40 percent lower income
group.
15
16
Climate Change Impact: Financial Market
The prospect of an economic slowdown and increasing inflation risk
will subsequently increase the uncertainties on global financial market.
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
This will eventually place pressure on the goods market.
17
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Policy Implications
Fundamental thought ... that the policies should be integrated in
different sectors and not be instituted to sacrifice the achievement of
long-term social welfare.
From a global perspective, at least two issues to be resolved as a
priority;
How to minimize the effects of soaring international commodity prices and
how to mitigate the impacts on particular groups;
How to promote environmentally friendly economic policies .
Collective international action may be seen as key to support these
efforts across countries. But how far can they go?
From the Kyoto Protocol ...137 developing countries have ratified the
protocol, but have no obligation beyond monitoring and reporting emissions.
The US has not ratified the treaty...
From the Bali Action Plan.... sharp cuts in global emissions will be required
to achieve the ultimate objective of the Convention and emphasizing the
urgency to address climate change as indicated in the AR4 of the
Intergovernmental Panel on Climate Change.
18
Policy Implications
A winding road ahead ......
Several obstacles - OECD Environmental Outlook to 2030 (2008):
(i)
(ii)
Fears of adverse impacts on industrial competitiveness.
Uncertainty surrounding who should take action and who should bear the
costs of action; and
(iii) Under pricing of natural resource use and pollution, it is difficult,
practically, to accurately calculate the full costs of environmental, health,
and productivity damage caused by economic activities.
The central issue is the cost calculation and fair burden sharing for
every country in adaptation and climate change mitigation.
19
Policy Implications: Indonesian Perspectives
Policy in Banking and Financial Sector ...
Bank Indonesia (BI) aims its policy towards supporting the
protection of the environment by encouraging banks to invest in
businesses that serve to protect the environment.
Under the framework of risk-based supervision, BI urges banks to be
aware of their operational risks, especially related to lending
activities to finance projects that have direct or indirect effects on
the environment.
Within the financial stability framework, BI considers the
surveillance of bank lending for projects that could potentially
damage the environment as important.
Indonesia itself has not yet used hedging instruments against
weather and catastrophic risks; yet traditionally building financing
structure mechanisms to protect domestic economy from the price risks.
20
Policy Implications: Indonesian Perspectives
Monetary Policy ...
High inflation due to rising food and oil prices has caused
dilemmatic condition for economic growth in Indonesia.
Empirical fact indicates that for demand stimuli not to generate excessive
inflationary pressures, demand management policy must be complemented
by the mitigation of capacity constraints on the supply side .....
Inflation targeting, has helped to anchor inflation expectations
among economic agents...
Monetary policy must be vigilant towards any second-round
inflationary effects that show up in core inflation
Movement towards a more flexible exchange rate also provides
greater scope for effective and stable monetary policy action
21
Policy Implications: Indonesian Perspectives
Fiscal Policy ...
fiscal spending should be aimed to guide long term goals, especially
alleviating supply bottlenecks—particularly related to infrastructure—that
have contributed to inflation pressures.
Efforts to reduce the level of protectionism as well as subsidies aimed
at stimulating biofuels production and increasing energy conservation not only
would help to moderate the growth in energy demand, but also would remove
distortions and allow for greater efficiency.
Fiscal self-insurance against climate change, whereby government
budgets must include room for adaptation expenditures, and social
safety nets must be strengthened.
For the case of Indonesia, the ‘compensating program’ is expected to
shift the benefit subsidy from the higher income group to the lower
income group, thus improve income distribution.
22
Policy Implications: Indonesian Perspectives
Policy in the Real Sector ...
The treatment of this problem has to focus on improvements in
goods and services supply.
Any trade restrictions that could induce a more limited world food
supply amidst persistent strong demand should be short term in
nature and applicable only for good reason.
As a part of the strategic steps taken on the supply side to cope
with spiraling oil prices, the Government has increased its target for
biofuel consumption as part of it’s National Energy Blueprint.
23
24
Introduction
Economic Development Imbalances and
Climate Change
Macroeconomic Impacts of Climate Change
Policy Implications and Responses
Concluding Remarks
Concluding Remarks
Sharing integrated economic policies is expected to help mitigate
the negative effects.
It is necessary to have adequate safeguards to avoid any
detrimental environmental effects.
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.
Countries need to pursue effective mitigation at the lowest cost.
Not only unequivocal political leadership of developed countries,
but also strong commitment from all countries to prove engagement
on climate change, are amongst the fundamental pillars to promote
global welfare.
25
26
Thank You …