By Rajendra Shende

Ask a central bank governor what role they should play on environmental issues, and most will suggest you’re talking to the wrong person stated Andrew Steer, CEO of the World Resource Institute and former Director, Climate Change in the World Bank.

Just before the Paris Climate Agreement, Mr. Steer made this comment highlighting the importance of the Financial Initiative of United Nations Environment Programme (UNEP). The initiative aims to engage private sector CEOs from around the world in investing in clean energy to mitigate climate change.

Dichotomy: Government and the Governor

Historically, chiefs of the central banks have overlooked the risks due to climate change and focused on their role as immediacy in tinkering with repo rate. They act as monetary technicians to reduce the risks for the savers and investors. Inflation, interest rate, and currency are the drivers of their anxieties rather than economic impacts of emissions of Green House Gas (GHG) and global warming.

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Climate change, the darkest impending risk comparable to the risk of terrorism? | Photo Courtesy: Karsten Wirth via Flickr

Astonishingly, the governments, for whom the central bank governors work, proclaim that climate change is the darkest impending risk comparable to the risk of terrorism. Such dichotomy in addressing climate change is even more alarming in case of India.

Rajan: The Prescient Governor

Thirty-two years back when the Governor Raghuram Rajan was a graduate student of electrical engineering at IIT, Delhi, he took a course on ‘Electricity Generation’. He seized well that power plants that generate electricity are significant contributors to global warming – an environmental challenge of planetary proportion. Electricity generation (along with heat generation) is indeed one of the significant sectors contributing more than 50 percent of total global emission of GHG. 

After emerging as a gold medalist at IIT, he excelled in management and economics in IIM, Ahmedabad.

Professors at IIM are the ones who author reports of Intergovernmental Panel on Climate Change (IPCC). IPCC reports claim in its latest assessment that unless the fossil fuels like Coal, Oil and Gas, used inter alia in power plants, are totally wiped out by 2100, the world will be hanging on the cliff of an economic disaster.

Rajan later did his doctorate at MIT – Sloan School in USA, the most prestigious institution by any standard.

Rajan later did his doctorate at MIT – Sloan School in USA, the most prestigious institution by any standard. Sloan School is known for its research on economics and policy on climate change. It even implemented climate-friendly policies and projects at its campus, led by students and Faculty that included Rajan.

Clearly, Rajan stands anew in the pack of governors, whose vision regarding climate changes are often contradictory to those of the government in power.

The Economics of Climate Change

At the Booth School of Business, Rajan spent a considerable time as a professor of several MBA and PhD courses. During the same time, he is known to have extensively researched on the kind of expenditures we must undertake to ensure that the planet remains inhabitable by time 2100 approaches. In fact, Booth School’s research used the classical and innovative discounted rates to arrive at the cost of trillions of dollars and insurance costs of billions of dollars.

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Raghuram Govind Rajan, the 23rd Governor of the Reserve Bank of India | Photo Courtesy: International Monetary Fund via Flickr

The three years that he spent in IMF as Chief Economist had been the years of intense debate on the economics of climate change. Christine Lagarde, IMF Chief, recently stated that climate deal in Paris would go a long way towards protecting the interests of the poorest members of society who are the first victims of climate change. Lagarde said, “There are many cynical voices out there, questioning the need for action” but was convinced that ‘action on climate change would re-energize the global economic goals’.

As the Governor at RBI, Rajan convincingly explained the link of continued low prices of dosa to the stagnancy of its technology of manufacture.

He talked effectively about ‘making in India’ first for Indians. He also opined publicly on the subject most detached from RBI’s mandate i.e. on tolerance in Indian society. But long-term economic and fiscal policies needed to mitigate climate change remained hidden in his discourse, like the fault lines he described in his famous book “Fault Lines: How Hidden Fractures Still Threaten the World Economy’.

History Speaks: Other Harbingers of Change

Lord Nicholas Stern, the first I. G Patel Professor of Economics and Government at London School of Economics (LSE) and Economic Advisor to the UK, carried out seminal research on ‘economics of climate change’. Interestingly, it was released just before the beginning of the financial crisis of 2007-08 famously predicted Rajan.

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Lord Nicholas Stern, the first I. G Patel Professor of Economics and Government at London School of Economics (LSE) and Economic Advisor to the UK | Photo Courtesy: Thiago Carrapatoso via Flickr

Lord Stern predicted the economic and monetary risks in a quantitative manner, in rest of the 21st century.

Lord Stern predicted the economic and monetary risks in a quantitative manner, in rest of the 21st century. His research warned the governments of impacts of climate change, including market failures in short and long term.

Lord Stern, who was also Chief Economist at World Bank, boldly stated in his research that the overall costs of climate change would be equivalent to losing at least 5% of global Gross Domestic Product (GDP) each year, now and forever. That would be an economic catastrophe and life-threatening scenario for the world’s poor. He went on to convince that the situation could be bailed out by budgeting just one percent of GDP to mitigate climate change.

There are other central bankers, like Mark Carney, the governor of the Bank of England, who has warned that climate change will lead to financial crises and falling living standards. Unless the world’s leading countries do more to ensure that their companies come clean about their current and future carbon emissions, the situation will worsen. 

Significantly, Janet Yellen, USA’s Chair of Board of Governors of the Federal Reserve System has recently lauded the Bank of England that warned the banks and insurers about the risks that climate change poses to their viability.

A Link Built, But Will It Sustain?

After September 2016, when Rajan would leave for academic world in the USA to placate his passion for new ideas, innovation, academic research for economics, many would wait for his incisive analysis that would predict a risk, this time, on climate led economic crisis.

The arrival of Urjit Patel as the new Governor of RBI from his past experience in the energy sector and his research papers on energy and climate change may herald much-needed connection of present missing links between climate change and financial world, mentored by RBI. 


Rajendra Shende is the Chairman of the TERRE Policy Centre and a leading expert and advisor to private sector, governments and NGOs on alternate technologies and evidence-based policies on sustainable development.

Featured Image Credits: jos.esteves via Flickr

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Posted by The Indian Economist