Intersecting crises are amplifying vulnerabilities in a world battered by climate change. Can systemic shifts ensure greater financial inclusion and pave the way towards a safer future?
The recent Global Financial Pact Summit in Paris came with some good news on climate finance. For starters, the World Bank announced that it will pause debt payments when countries are hit by natural disasters for the most vulnerable countries — a welcome move as climate extremes continue to grow. This announcement gave the much needed hope after some uneasy couple of years.
Starting in 2020 with COVID-19 pandemic, growing geo-political tensions, Russia’s invasion of Ukraine, resulting food and fuel price hikes, rising emissions, etc, the last few years threw up a cluster of problems, and became synonymous with the term ‘polycrisis’.
The word picked up pace at the World Economic Forum (WEF) at Davos, Switzerland, earlier this year. In simple terms, it means rising and cascading multiple crises interacting together and amplifying the impacts of one another.
In not so simple terms, “A global polycrisis occurs when crises in multiple global systems become causally entangled in ways that significantly degrade humanity’s prospects. These interacting crises produce harms greater than the sum of those harms the crises would produce in isolation, were their host systems not so deeply interconnected,” said Dr. Michael Lawrence, research lead of the polycrisis project, Cascade Institute, Canada, in a webinar organised by the Earth Journalism Network (EJN).
The world wide web of risks
Shortly before the event in Davos, WEF released a Global Risks Report 2023, which included a Global Risks Perception Survey (GRPS). The survey brought together leading insights from over 1,200 experts who ranked the most-severe short-term and long-term risks, where about half of the experts were from Europe and North America. Respondents representing the private sector make up about 54% of the participants and 60% were between the age of 30 and 60 years.
According to the survey, the cost-of-living crisis was identified as the most immediate risk, while failure to mitigate climate change emerged as the biggest risk over the next 10 years.
The inference is that, in the long run, climate-related risks are both the most foreseeable as well as the most certain. Sudden and unaccounted for risks, which can emerge either from the failure to mitigate these climate and environmental risks or emerge completely independently, can further add to other climate risks that may materialise.
For instance, a zoonotic disease outbreak may happen as a result of the ‘biodiversity loss and ecosystem collapse’. Right now it is hard to know what the next zoonotic disease outbreak can look like and what implications it will have on social, economic, and political make-up globally. If nothing else, looking at COVID-19, one can say that it could lead countries to take unprecedented steps and deeply challenge the existing modus operandi, while hitting the already vulnerable the hardest.
Similarly, an unforeseeable war between two countries, like Russia’s invasion of Ukraine, may send the rest of the world in a resource frenzy, may upset global supply chains, while making climate challenges worse and eating away at financial resources to deal with them at the same time.
Such interactions can manifest in many ways. The web of crises mapped out below gives some idea of how these growing risks may interact with each other.
One could argue that multiple intersections have previously existed, too. The second world war was the intersection of, say, geo-political tensions, erosion of social cohesion, compromised democracies and shift towards authoritarianism, etc. to name a few. However, two factors now make the current situation different from previous ones: hyper globalisation, and planetary boundaries and biophysical limits.
“First, global interconnectivity has expanded and created new vulnerability, revealing such precarious interdependencies between international finance, energy, food production and supply chains. Second, our present situation is unprecedented as human activities are pushing against planetary boundaries and biophysical limits. Whether it’s through cascading climate tipping points, or collapse of biodiversity, or really forcing the earth system from its holocene equilibrium to a different set of states and behaviours for which are ill prepared,” added Lawrence.
For example, addressing global decarbonisation while a war goes on in Ukraine is much harder in the middle of an energy transition, as attention and resources are being diverted from urgent climate action, while also returning to fossil fuels to ensure energy security.
Zooming in on India
Last month, India overtook China as the most populous country in the world. A country home to the largest population in the world obviously has big demands in terms of consumption. India is also one of the most vulnerable countries to climate change. While malnutrition, unemployment, rising prices, etc. have always bothered the common men here, climate change has added fuel to the fire.
The economic costs of climate impacts in India are already big. Climate change events usually lead to adverse supply shocks, which as a result, reduce the economy’s output and raise prices. Let’s briefly look at how climate change is making the cost-of-living crisis worse in India by making the existing systems for food and housing unreliable.
When we talk about climate vulnerability in India, three things stand out according to Vaibhav Chaturvedi, Fellow, Council on Energy, Environment and Water (CEEW). “First, India is a low-income economy. When that’s the case you have a lower capacity to adapt to any shock. Second, India is primarily an agrarian economy. We are not talking in terms of GDP share, but in terms of how many people depend on agriculture directly or indirectly. Climate-change induced irregularities in rain are visibly affecting our agriculture, which is largely rain-fed. Rainfall is becoming varied, in terms of frequency as well as intensity, impacting production and leading to food inflation,” he said.
For example, inflation in onion prices shot up to 327% in December 2019 and potato prices by 92% in November 2020 due to unseasonal rains while tomato prices went over 168% in June 2022 due to heatwave and cyclone-led crop damages.
And third, Chaturvedi added, India has a huge coastline. In 2020, Cyclone Amphan alone affected about 13 million people and caused over $13 billion in damage after it made landfall. CarbonCopy reported on how climate change is making cyclones more intense on both sides of the Indian coast.
Another report said that climate change manifested through rising temperature and changing patterns of monsoon rainfall in India could cost the economy 2.8% of its GDP and depress the living standards of nearly half of its population by 2050. On top of that, productivity losses caused by heat related stress in India, specially in agriculture and construction industry, could account for 34 million of the projected 80 million global job losses from heat stress associated productivity decline by 2030.
Not just rising temperatures, but rising sea levels are a growing threat to coastal communities in India. Sinking islands in Sundarbans, for example, are giving rise to environmental migrants, snatching away means of livelihoods and a sense of belonging from them.
Unforeseen climate events compounding the existing vulnerabilities not only impact the economy as it is but can also be an obstacle in furthering economic growth. “The low supply of wheat due to the Russia-Ukraine war emerged as an opportunity for a lot of countries to export their wheat. India, too, had planned to export as we were supposed to have a bumper production. And then the heatwave came and we could export little. So, this was a completely unanticipated impact of climate change,” Chaturvedi explained.
Within India and globally, climate change is interacting with other risks, making the polycrisis worse and putting the world on a spot where it hasn’t been before.
Age of climate apartheid
The UN has warned of a ‘climate apartheid’, where rich countries pay to escape rising heating, hunger and conflict, while the rest of the world is left to suffer.
For instance, take Russia’s war on Ukraine, which has led to global inflation. The central banks around the world are responsible for regulating inflationary pressures domestically. To combat inflation, the obvious response of these banks globally has been to increase the rate of interest. Doing this gives a bigger incentive to commercial banks in the country to keep their money in the reserves and to raise their own rates of interest to make any lending worth it. This, as a result, restricts the flow of money circulation in the economy, limiting the purchasing power of people, bringing down the prices and fighting inflation.
Another consequence of higher interest rates implemented by the developed world is that the cost of credit increases for developing and the under-developed world. The rate of interest for the developing and underdeveloped countries are already higher, in comparison to the developed countries, and depend on their credit ratings. A country’s credit rating is identified by its ability to pay back the debt. The higher the risk for the lender, the higher the rate of interest. On top of that, the shooting rates of interest as a response to rising inflation has put high dest stress on many countries.
David Malpass, ex-World Bank chief, was in India to attend the G20 finance ministers and central bank governors meeting and to co-chair a debt roundtable earlier this year. During his visit he told the Economic Times that many developing countries are facing tough times because of the high price of food, energy and fertiliser, making agriculture a big challenge for these countries. Higher interest rates prevailing in the global markets are leading to much higher financing costs and interest rates on debts for the developing world.
Finance experts have warned of debt distress as high interest rates are “squeezing low-income countries.” About 60% of Africa’s low-income countries are in debt distress. At the same time, developing and under-developed countries around the world are also increasingly under climate-stress due to frequent disasters, loss of infrastructure and economy.
Countries that need investments in health, education and social spending also need to invest in their resilience to climate change, in clean infrastructure development in order to withstand the climate crisis. However, the rising debt is crippling. How is climate apartheid unfolding here?
“The vulnerabilities that come from being indebted in the middle of a climate crisis is that these countries have high public debt. This means that many countries are paying more interest than their investment in education and health, leaving less money to invest in sustainable agriculture, energy development, mitigation or adaptation. This makes you more vulnerable to extreme weather, resulting in more expenses and additional borrowing. This confluence is becoming so systematically large now that we need to look at how these (international financing) institutions are working and governed,” said Rachel Kyte, dean of the Fletcher School at Tufts University and former World Bank special envoy for climate change, at EJN webinar.
The need for a system reset
Malpass’s decision to step down as the World Bank president was followed by his controversial statement made a couple of months ago where he said he did not know if burning of fossil fuels was leading to the climate crisis.
“There was pressure from borrowing and donor countries, civil society, businesses, that the World Bank group as a part of the Multilateral Development Banks wasn’t doing enough, or quickly enough for polycrisis, especially environmental polycrisis. That clearly had an impact in the change of leadership at the bank earlier than normally expected. Ajay Banga, now the World Bank president, has spent time looking at issues of financial inclusion as the CEO of Mastercard. He is coming in at a time when both those who borrow from and those who lend to the bank understand that the bank needs to change,” added Kyte.
The developing world is now consistently pushing for a financial transition which is fair, equitable and one which enables them to rise against the growing climate risks. In a climate battered world, both physical and transitional risks from climate change can affect the borrower’s ability to repay the debt. Physical risks can be, say, floods and storms, while policy changes and the development of new technologies, such as the use of renewable energy, are examples of transition risks.
Citing outdated functioning and a need to reform, the Barbadian Prime Minister Mia Mottley introduced the Bridgetown initiative. Barbados wanted to change the way wealthy nations financially support developing nations to address the climate crisis. The initiative outlined three major steps for development banks to efficiently finance vulnerable and under-developed countries. First step is to change some loan conditions which stop these countries from spiralling into a debt cycle. Second, the plan encouraged development banks to lend $1 trillion more to poor countries for climate resilience, including discounted lending targeted at “building climate resilience in climate-vulnerable countries”. Third, the initiative urged to create a new mechanism with support from the private sector to finance climate mitigation and recovery following a climate calamity.
More and more such initiatives are coming up. Take, for instance, the V20’s Accra to Marrakech Agenda led by Ghana. The V20 Group represents 58 of the world’s most systemically climate-threatened economies. The group has identified four key priority areas through the agenda to guarantee a global economy “fit-for-climate” and supportive of its most vulnerable groups. This includes the need to mobilise an ambitious share of world GDP to secure a sustainable future for the global economy amid an escalating climate emergency, and a downscaling of financial resources that undermine the fight against climate change.
The recent Financial Summit in Paris saw progress on pausing debt payments when countries are hit by natural disasters, which was a key component of the Bridgetown agenda.The bank said that it will also offer countries the ability to divert funds lent by the World Bank to emergency needs during a crisis, “for example to redeploy undisbursed funds in longer-term infrastructure projects for immediate disaster response”.
Additionally, the UK’s export credit agency, UK Export Finance, also announced at the summit that it would add these clauses to its new and existing loan agreements with twelve partner countries in Africa and the Caribbean, to allow them to defer debt repayments if they are hit by climate catastrophes, such as hurricanes or floods.
The G20 and G7 had jointly launched the Global Shield against Climate Risks at COP27 to provide vulnerable countries more means to protect themselves from increasingly extreme weather.
Resistance to contribute
There was also progress on recycling of Special Drawing Rights (SDRs) at the summit, but approval from US Congress held up meeting the goal of $100bn SDRs. During the COVID-19 pandemic, the International Monetary Fund (IMF) issued a historic $650 billion in Special Drawing Rights to help countries respond to the crisis and stabilise the global economy. SDRs can be exchanged for another member’s reserves, such as dollars, pounds or euros, to import goods or to make payments like servicing debt. However, the world’s biggest economies — which needed the least financial support — received most of this allocation. So while countries like France increased their previous pledges to 40%, the US’s promised contribution of $21bn has been pending the US Congress’ approval for months.
CarbonCopy previously also reported about how the developed countries totally and immediately rejected the developing country proposal for climate finance at the Bonn climate conference last month. It only re-emphasised the perception that developed countries want to engage them in mitigation discussions without contemplating means of implementation. Additionally, in an interview Banga — a US citizen —said that “he would wait to seek a capital increase” until there’s progress on re-focusing the bank’s development lending on more impactful projects. This simply means that he intends to make do with the currently available funds rather than urging the developed countries to pay their fair share towards the much-needed climate action in the developing world.
Political pressure is already emerging in the new leadership, which will only add more stress to the existing lack of trust by the developing world in a globally skewed political and economical powerplay. While there is no certain “pathway” to exit the environmental polycrisis, fair and inclusive financial and institutional reforms can be the initial steps to untangle this precarious web.
Are the power centres of the world ready to sign up for what it takes?