The recent calamities linked with anthropogenic climate change have compelled macroeconomists to undergo a profound reevaluation of macroeconomic modelling that integrated climate risk, shifting their focus towards sustainability as a pressing priority. In this paradigm shift, climate risk emerges as an indispensable component of the modern production function, emphasizing the urgency to incorporate it into macroeconomic planning. Without the integration of green energy and environmental policies, such planning remains incomplete and inefficient, failing to address the critical challenges posed by climate change.
This notion carries multifold importance, particularly for developing countries like Pakistan, both vulnerable to climate change and victims of climate injustice, as its share in global emissions is less than one percent. Sometimes, we are faced with floods, and sometimes droughts. We need to solve this climate change-induced crisis through an integrated approach of 3Es, Economics, Energy, and Environment. Recognizing the interconnectedness between sustainable energy policies, climate resilience, and macroeconomic stability, policymakers in Pakistan must now prioritize green energy initiatives and environmental policies. By embracing renewable energy sources, optimizing resource efficiency, and implementing stringent environmental regulations, Pakistan must mitigate climate risks, reduce greenhouse gas emissions, and foster sustainable economic growth.
Pakistan faces a multifaceted crisis encompassing economy, energy, and environment. The severity of this crisis has been exacerbated by poly crises, including rampant inflation, the Russia-Ukraine conflict, the covid-19 pandemic aftermath, and the impacts of climate change. Pakistan thus has a substantial current account deficit due to the widening gap between capital inflows and outflows, resulting in escalating debt levels. According to the SBP, the total imports for March were $3.99 billion, of which 36.52 percent were petroleum products.
On the energy front, Pakistan heavily relies on imported energy, particularly for power and transportation. This reliance presents a significant challenge and adds to the country’s economic woes. Additionally, in terms of the environment, Pakistan experiences adversities such as flash floods, heatwaves, melting glaciers, droughts, and changing weather patterns. These crises are interconnected, as an economically vulnerable situation prompts inefficient choices in the energy sector, leading to environmental deterioration such as air pollution, smog, heatwaves, inadequate flood management, and insufficient adaptation measures.
Therefore, changes in one area reverberate across others. For example, Pakistan’s heavy dependence on petroleum products for transportation is both financially burdensome and environmentally unsustainable. The country spends a staggering $15 billion annually solely on petroleum products for transportation. This heavy reliance on fossil fuels not only exacerbates the country’s balance of payments issues but also contributes to severe environmental degradation and public health hazards. Furthermore, the volatility of global oil prices exposes the economy to external shocks, as rising oil prices not only increase the trade deficit but also lead to currency depreciation and inflation.
So green investments, particularly in the renewable energy sector are most critical for Pakistan. They can provide a cushion to macroeconomic shocks, inflation, current account vulnerabilities and self-sufficiency. However, without integrating green solutions into economic policies, the problems seem unresolved. Presently, it seems to be treated as residual. It needs to be built into the macroeconomic and financial stability framework and policies.
Below are actionable pathways to achieve an integrated approach to deal with macroeconomic crises that endogenize climate risk. We need a comprehensive framework to raise green financing. It must be built on three key pillars.
The first is Public Sector Policies. To address the pressing issue of climate change and promote sustainable development, the government should implement a range of public sector policies. At the forefront is the need for a comprehensive tax policy that actively encourages and supports green investments. By introducing tax incentives, such as tax credits, for businesses and individuals investing in environmentally friendly initiatives, the government can potentially stimulate the transition to a low-carbon economy.
By these actionable pathways through public sector policies, international collaboration for climate financing, and engagement with the private sector with a comprehensive framework Pakistan can pave the way towards a greener and more resilient future, simultaneously addressing the economic, energy, and environmental crises it faces.
A recent example of such a policy is the US inflation reduction act that targets the reduction of inflation through the provision of tax incentives to green initiatives such as green hydrogen and other renewable energy initiatives. This policy will not only create financial incentives for companies to adopt greener practices but also accelerate the deployment of renewable energy sources, sustainable transportation, and eco-friendly technologies.
Additionally, it should include measures discouraging polluting industries, such as higher taxes or penalties for businesses with high carbon emissions. By implementing a robust national green tax policy, the government can play a crucial role in driving sustainable investments and fostering a greener future.
Another crucial national solution is the adoption of “green central banking” principles. Green central banking entails integrating environmental sustainability considerations into the decision-making processes of central banks and monetary transmission mechanisms. This approach recognizes the significant financial sector role in driving economic activities and can influence capital allocation . By incorporating green criteria into its monetary transmission mechanism, SBP can incentivize financial institutions to prioritize investments in sustainable projects and businesses. Green central banking involves conducting environmental risk assessments and climate stress tests to evaluate the potential impact of climate-related events on the financial system. By embracing green central banking principles, Pakistan can align their monetary and financial policies with its National Determined Contributions and foster the development of green financial markets and contribute to the transition towards a more sustainable and resilient economy.
Another essential solution is the implementation of green lending practices. Green lending refers to financial institutions providing loans and credit specifically for environmentally friendly projects and initiatives. By offering favourable terms, lower interest rates, and longer repayment periods for green investments, financial institutions can incentivize businesses and individuals to undertake sustainable projects. This encourages the transition to cleaner energy, energy-efficient infrastructure, sustainable agriculture, and eco-friendly technologies. Green lending not only supports the growth of sustainable industries but also mitigates the risks associated with climate change by redirecting capital away from environmentally harmful activities. By integrating green lending practices into the national financial system, governments can harness the power of finance to drive positive environmental change and contribute to a greener and more sustainable future.
Another potential solution is to foster the growth of sustainable investments and encourage participation from small investors, a domestic solution which lies in the development of capital and equity markets. This entails creating an enabling environment that facilitates the pooling of funds from small investors into green projects.
One crucial aspect is de-risking investments in green bonds and other sustainable financial instruments. This can be achieved through various measures such as providing government guarantees or insurance against potential losses, establishing green investment funds, and promoting transparency and standardization in the evaluation and reporting of environmental performance. By de-risking green investments, the barriers to entry for small investors are reduced, making it easier for them to participate in sustainable projects. Capital and equity market development, combined with de-risking strategies, can unlock new funding sources, mobilize private capital, and significantly contribute to the scaling up of sustainable initiatives, ultimately accelerating transition to a low-carbon economy.
The second pillar is international collaboration in terms of climate financing. To mobilize green financing and investments from international funds and forums, the government should establish a dedicated department for engagement, develop a national climate finance strategy, strengthen institutional capacities, promote an attractive investment environment, and actively engage in terms of climate diplomacy with international platforms. These actions will enable the country to effectively access and utilize international funds, attract green investments, and drive the transition towards a sustainable future.
Internationally, it is crucial to foster collaborations and secure sustainable financing for green infrastructure projects. In this regard, the government should actively seek partnerships with organizations like the European Union and other development partners to unlock multilateral and bilateral green financing, thereby accelerating transition towards a sustainable future. It is crucial to foster collaborations that facilitate the issuance of dollar-denominated green bonds, leveraging expertise and market presence. This can be achieved by establishing dedicated channels of communication and negotiation, promoting policy harmonization, and providing necessary support for the development and implementation of green infrastructure projects.
The last pillar is to ensure sustainable green financing, with active engagement with and participation from the private sector. There is a need for a stronger focus on the local market, which holds significant growth potential for green financing. To create a conducive environment, clear guidelines for green investments must be established, going beyond traditional green bonds to include innovative green financial instruments. Incentives should be provided to encourage green investments, moving beyond mere moral duty slogans, and ensuring competitive returns on green financing instruments. Furthermore, eligible categories for the use of proceeds should be extended to encompass a wider range of sustainable projects.
Capacity development efforts should target both the supply and demand sides of the market to foster a robust ecosystem. The corporate sector must lead by example, integrating sustainable practices into their operations. Drawing lessons from successful models like China, the role of the Central Bank becomes critical in developing a comprehensive framework for green financing, attracting both local and foreign investors. By implementing these measures, the private sector can play a significant role in driving sustainable and climate-friendly investments.
The time is ripe for an integrated approach to address the macroeconomic challenges posed by climate change. It emphasizes the urgency of incorporating sustainability and climate risk into macroeconomic planning and policymaking. By prioritizing green energy initiatives, implementing environmental policies, and fostering sustainable investments, Pakistan can mitigate climate risks, reduce greenhouse gas emissions, and promote sustainable economic growth.
By these actionable pathways through public sector policies, international collaboration for climate financing, and engagement with the private sector with a comprehensive framework Pakistan can pave the way towards a greener and more resilient future, simultaneously addressing the economic, energy, and environmental crises it faces.
