One Way to Address Inflation: Take Action on Climate Change

Climate change impacts are a factor in the increasing cost of food. Photo: ADB
Climate change impacts are a factor in the increasing cost of food. Photo: ADB

By Yesim Elhan-Kayalar

Climate change is now being felt at the dining table and the consumer’s wallet. The prices of food and many other products and services are soaring, and one of the causes is “climate change inflation”.

We know climate change’s debilitating effects on biodiversity, energy, food, water, housing, and public health. We talk about the cost of transforming our industries, energy and transport sectors, our consumption patterns and how complicated and financially onerous these can be for developing and developed economies alike.

What we do not hear much about is the economic emergency created by climate change, through the pressure it increasingly places on product prices around the globe. Not just the costs of hurricane destruction, real estate losses, energy costs and water shortages but increasing input and financing costs triggered by climate change.

Let us, for a moment, consider a different facet of climate change – “climate change inflation.”

Cyclical effects of climate change, extreme weather events, and global warming, have an impact on agriculture, tourism and other weather dependent industries. Agriculture, agro-processing, and animal husbandry are extremely vulnerable to climate change. Higher temperatures and erratic precipitation levels reduce annual yield and quality of key food crops, cause crop failures, reduce access to food, and even help proliferate weeds and pests which further erode crop yields.

This has two implications – food prices go up and food security declines, including for the 79% of world’s poor that live in rural areas. And it does not stop with crop prices. Higher prices of staple crops like corn, rice, wheat at the bottom of the value chain lead to a tsunami of price increases in production and consumption up the value chain.

The UN’s Food and Agriculture Organization has reported that world food prices have increased by more than 31% from 2020 to 2021. Higher food prices impact food affordability and food access for low-income families.

The UN’s Food and Agriculture Organization has reported that world food prices have increased by more than 31% from 2020 to 2021.

Through higher export and import prices, they impact trade. With increasing food prices around the world, both importing and exporting countries are adversely affected – importing countries’ ability to source food diminishes, exporting countries’ ability to protect their share of global markets with competitive pricing and high-quality crops and animal products erodes. An unexpected adverse impact of increasing food prices has been increased demand for farmland. In tropical areas, agriculture has been one of the drivers for deforestation, setting a vicious cycle in motion.

In global value chains, staple crops are not the only essential inputs that are affected by climate change inflation. Energy prices have been on the rise as well, and they are expected to keep increasing as household and commercial demand for cooling and refrigeration systems continue to rise in response to global warming. A recent World Bank study forecast that energy prices are expected to average more than 80% higher in 2021 compared to 2020, and will maintain their upward trend in 2022. Energy is a key input for manufacturing and industry, hence increased energy prices are passed up the value chain and to the end-users. Yet another transmission channel for climate change inflation.

Shortly after governments signed the Paris Agreement in 2015, the United Nations’ Environment Program’s Adaptation Finance Gap report estimated the cost of climate change adaptation in developing countries to be as high as $300 billion per year in 2030 and $500 billion per year in 2050. By November 2021, economists were pointing to potential losses of as much as 14%, or $23 trillion, in global GDP by 2050.

The longer term outlook is more dismal if we do not act to address the multi-faceted climate change problem – $69 trillion loss in global GDP and 83 million lives lost due to global warming by 2100. Developing Asia and the Pacific will be particularly vulnerable to the impact of climate change and climate change inflation. With lower resilience levels, countries in the Asia-Pacific region are warned to expect higher GDP losses, lower crop yields, growing food security and health concerns These statistics alone are a resounding call for immediate action.

At the recent 26th UN Climate Change Conference of the Parties (COP26), world leaders committed to strengthening global efforts for climate change mitigation, sustainable development, and poverty eradication. Looking at climate change more than as a food, environmental or energy crisis alone would diversify the diagnostic and policy tools in their arsenals to chart out all that we need to do and all the fronts on which we need to fight climate change.

Climate change has many facets, including an inflationary impact. Is climate change the only driver of inflation? Certainly not. But it does create its own brand of inflation and exacerbate the problem globally. For environmental as well as economic resilience, it will be critical for policy makers and development stakeholders to recognize climate change inflation as a problem in its own right and not as a by-product of the overall climate change agenda, which will quietly disappear after we get global temperatures lower and sea levels down. Climate change is at the family dining table now. It is in the consumer’s wallet now. Climate change inflation requires a policy response now.

Climate change has created an economic crisis, in addition to environmental, food, health, infrastructure problems it has unleashed. Clearly framing this emerging problem early on would help us craft policy responses that draw on relevant domain expertise. We cannot afford not to if we are to achieve both environmental and economic sustainability going forward.