Sunday 25 October 2020

IMF World Economic Outlook lectures India on virtues of cleaner energy

Countries with fast economic and population growth, reliance on high carbon energy and oil producers will bear larger transition costs

The World Economic Outlook of the International Monetary Fund (IMF) released this month has several observations about — and lessons for — India. Citing the slowdown worldwide caused by the China-origin coronavirus pandemic, it says, “As economies reopened and released constraints on spending, overall activity normalised faster than anticipated in the June 2020 WEO Update. GDP outturns for the second quarter surprised on the upside in China (where, after lockdowns eased in early April, public investment helped boost activity to return to positive growth in the second quarter) and the United States and euro area (where both economies contracted at a historic pace in the second quarter, but less severely than projected, with government transfers supporting household incomes).

“The news, however,” says the IMF in the report, “was not uniformly positive. (The) second-quarter GDP was weaker than projected, for instance, where domestic demand plunged following a very sharp compression in consumption and a collapse in investment (such as in India), where the pandemic continued to spread (such as in Mexico), where soft external demand weighed particularly heavily on exporting sectors (for example, in Korea), and where significant weakening of remittance flows weighed on domestic spending (for example, in the Philippines).

“By late September,” the IMF notes in WEO 2020, “the number of confirmed infections worldwide exceeded 33 million, with over a million deaths — up from more than 7 million infections and 400,000 deaths at the time of the June 2020 WEO Update. Confirmed cases rose dramatically in the United States, Latin America, India, and South Africa. Moreover, there were renewed upticks in places that had previously flattened the infection curve: Australia, Japan, Spain, and France.”

On inflation, the IMF says, “While prices of such items as medical supplies increased and commodity prices lifted from their April trough (Commodities Special Feature; Figure 1.4), the effects of weak aggregate demand appear to have outweighed the impact of supply interruptions.1 In sequential terms, inflation in advanced economies remains below pre-pandemic levels (Figure 1.5). In emerging market and develop- ing economies inflation declined sharply in the initial stages of the pandemic, although it has since picked up in some countries (India, for example, reflecting supply disruptions and a rise in food prices).”

The world is witnessing a unique recession, the IMF notes in the report. It says, “The downturn triggered by the COVID-19 pandemic has been very different from past recessions. In previous downturns, service-oriented sectors have tended to suffer smaller growth declines than manufacturing. In the current crisis, the public health response needed to slow transmission, together with behavioral changes, has meant that service sectors reliant on face-to-face interactions—particularly wholesale and retail trade, hospitality, and arts and entertainment—have seen larger contractions than manufacturing. The scale of disruption indicates that, without a vaccine and effective therapies to combat the virus, such sectors face a particularly difficult path back to any semblance of normalcy.”

There was “a strong rebound in the third quarter, but slowing momentum entering the fourth quarter,” the WEO notes. It says, “High-frequency indicators suggest a strong, albeit partial, rebound in activity in the third quarter, after the trough in the second quarter. However, momentum going into the fourth quarter appears to be slowing. Business surveys of purchasing managers show firms in the United States, euro area, China, and Brazil, for example, expanded output successively in July and August compared with the previous month, whereas the opposite was true elsewhere (for instance, in India, Japan, and Korea). For September, these indicators point to stronger activity in manufacturing but some setback for services, most likely reflecting the increase in infections. Other high-frequency data suggest a levelling off in activity — as reflected, for example, in daily consumer spending in the United States.”

In the emerging markets and developing economies, the IMF says, “prospects continue to remain precarious”. “This reflects,” the WEO says, “a combination of factors: the continu- ing spread of the pandemic and overwhelmed health care systems; the greater importance of severely affected sectors, such as tourism; and the greater dependence on external finance, including remittances. All emerging market and developing economy regions are expected to contract this year, including notably emerging Asia, where large economies, such as India and Indonesia, continue to try to bring the pandemic under control. Revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second quarter. As a result, the economy is projected to contract by 10.3% in 2020, before rebounding by 8.8% in 2021. Regional differences remain stark, with many countries in Latin America severely affected by the pandemic facing very deep downturns, and large output declines expected for many countries in the Middle East and Central Asia region and oil-exporting countries in sub-Saharan Africa affected by low oil prices, civil strife, or economic crises. Growth for emerging market and developing economies excluding China is projected at –5.7% for 2020 and 5% for 2021. The projected rebound in 2021 is not sufficient to regain the 2019 level of activity by next year. Growth among low-income developing countries is projected at –1.2% in 2020, strengthening to 4.9% in 2021. Higher population growth and low starting levels of income imply that even this more modest contraction compared with most emerging market economies will take a very heavy toll on living standards, especially for the poor.”

Global current account deficits, according to the IMF projection, will shrink in 2020 to the lowest level in the past two decades and remain broadly stable thereafter. Among creditor countries, surpluses are projected to decline in east Asia and to a lesser extent in Germany and the Netherlands, reflecting the weaker external environment, while the surplus in oil exporters is projected to turn into a modest deficit. These offset a modest increase in the projected surplus for China. Among debtor countries, smaller deficits are projected for Latin America, despite negative terms-of-trade shocks, mainly reflecting pronounced weakness in domestic demand, as well as for India and the United Kingdom on the back of lower oil prices and weak domestic demand.”

On the demand side, the IMF says, “In the natural gas market, spot prices have hovered around record lows in recent months amid large inventories left in place after a mild winter, weak demand, and subdued oil prices. This led oil producers to burn off large amounts of unwanted natural gas as a byproduct of oil extraction — equivalent to 400 metric tons of carbon dioxide (CO2) in 2019, the most since 2009, according to the World Bank. In late August natural gas prices increased due to an expected rise in winter demand, supply uncertainty in Asia, and technical trading patterns. Competing with natural gas for electricity generation, coal has also experienced significant downward price pressure, although supply disruptions in South Africa and strong demand from Indian industrial buyers supported South African coal prices, while Australian prices have been depressed by China’s apparent tightening of import restrictions and by Japan’s intention to phase out inefficient coal-fired power plants by 2030.”

The IMF observes an increasing reliance on coal in this part of the world and in similar economies. “coal decline was surprisingly interrupted in the 1970s and then partially reversed by three significant factors:

  1. energy security concerns (because of the twin oil shocks of the 1970s)
  2. the growing electrification of energy end-uses, and
  3. fast economic growth in emerging markets.

The combination of (1) and (2) contributed to increased demand for coal for power generation in many advanced economies that wanted to reduce dependence on oil because of energy security concerns, the IMF says.

“Later, at the turn of the century, as economic growth shifted to markets with higher coal intensity (that is, coal consumption per unit of GDP) and income elasticity of coal demand (such as China and India), coal demand in emerging markets surged, more than offsetting declining coal usage in advanced economies. As a result, global per capita coal consumption, its energy share, and even coal intensity increased again: the coal renaissance.

Today, the top five coal-consuming countries (China, India, United States, Russia, Japan) account for 76.7% of global coal consumption (Figure 1.SF.7). China accounts for about half of global coal consumption after industrial and power generation coal demand grew particularly fast in the mid-2000s following an infrastructure boom. In fact, today, driven by China, emerging markets, where industry coal demand is still important, account for the lion’s share — 76.8% — of coal consumption. Globally, the industry takes about 20% of total coal consumption.

Results strongly support the presence of an inverse U-shaped relationship between income and the share of coal in the energy mix, with coal attaining its maximum share at an income level of $ 9,600 per capita — that is, when a country reaches upper-middle-income status.

For example, our main specification predicts that, between 1971 and 2017, income per capita contributed to reductions in the coal share of 6.4 percentage points in the United States and 5.2 percentage points in Japan and to increases of 12.2 percentage points in India and percentage points in China.

On overall energy consumption, the IMF says, “in contrast to studies examining total energy consumption, a large part of the variation in coal dependence is unexplained. In part, this may reflect political economy factors leading to cross-country differences in energy policies. In some countries the value of coal reserves is multiples of GDP, raising the risk of stranded coal assets. Strong domestic mining interests in large coal consumer and producer countries, especially in Asia, including China and India, may further complicate and delay the phaseout of coal in major coal consumer-producer countries.

“Moving away from coal.” the WEO report reads, “usually starts in high-income nations and takes decades to complete. The pandemic may have dented coal consumption but, probably, only temporarily. Moreover, countries that have recently, or not yet, seen per capita coal consumption peak (including China, India, and Indonesia) account for the lion’s share of global coal consumption, which will therefore take years to decline in the absence of significant policy actions. Further significant reductions in prices of low-carbon alternatives such as solar and wind may help, but to avoid the intermittency problem associated with renewables, natural gas (the closest substitute for coal) is probably needed even if electricity demand does not fully recover to its pre-pandemic trend.”

“The economic costs of the low-carbon transition differ across the world. Countries with fast economic and population growth (such as India and, to a lesser extent, China), those with heavy reliance on high-carbon energy (such as China), and most oil producers are likely to bear larger transition costs. However, for fast-growing countries, these costs remain small given their projected growth over the next 30 years (even under mitigation) and need to be weighed against substantial avoided damage from climate change and co-benefits from climate change mitigation, such as reduced local pollution and mortality rates. If advanced economies were to enact mitigation policies on their own, they would not be able to keep global emissions and temperature increases to safe levels; joint action by the largest economies is critical to avoid the worst outcomes of climate change. For fossil fuel producers, the required diversification of their economies will be difficult, but many of them also stand to benefit from global climate change mitigation,” the IMF WEO report says.

“In the absence of new climate change mitigation policies, global carbon emissions are projected to continue to rise at an average annual pace of 1.7% and reach 57.5 gigatons by 2050 (Figure 3.4).32 Improvements in energy efficiency and some penetration of renewables—reflecting a continuation of current policies and some autonomous increases (for example, reflecting consumer preferences) — cannot offset the forces of population and economic growth that are driving emissions. Whereas advanced economies have historically contributed the lion’s share of emissions, China and India, as large and fast-growing emerging market economies, are significant emitters and are expected to continue to account for growing shares of carbon emissions. Their per capita emissions, however,” says IMF, “still remain relatively small when compared with those of advanced economies. Global growth is assumed to progressively decline from 3.7 percent in 2021 to percent in 2050, reflecting a tapering off of growth in emerging market economies as they catch up toward the income levels of advanced economies.”

The report appreciates the fact that it is an uphill task for developing countries to switch to better modes of energy consumption. “Countries with fast economic or population growth (India, especially; China, to a lesser extent) and most oil producers are bound to experience larger economic costs by forgoing cheap forms of energy, such as coal or oil. These output costs nevertheless remain modest relative to baseline growth for most. For example, with the policy package, India’s GDP would be 277% higher in 2050 than today, only moderately below what it would have been with unchanged policies (287%). But more important, these economic costs also need to be weighed against avoided damage from climate change and co-benefits from climate change mitigation,” the report says.

“The countries for which economic costs are larger are also the ones that would enjoy immediate substantial co-benefits from acting to curb carbon emissions (Figure 3.9, panel 2). These are reductions in mortality risks and improved health from less air pollution (thanks to lower use of coal and natural gas) and reduced road congestion, traffic accident risk, and road damage (associated with the taxation of gasoline and road diesel). While the value of saving lives goes well beyond economic gains and quantifying the economic value of human life and health is difficult, existing valuations (see, for example, the October 2019 Fiscal Monitor; and Parry, Veung, and Heine 2015) indicate that many countries would experience substantial economic gains from co-benefits — on the order of 0.7 per- cent of GDP immediately and 3.5% of GDP by 2050 for China, and 0.3% immediately and 1.4% by 2050 for India,” IMF says.

“Combining real GDP effects and co-benefits yields net benefits throughout the transition for China and smaller transitional costs for India, Russia, and others. Without global policy action, damages from climate change increase sharply after 2050. Therefore, all countries would experience substantial benefits from avoided climate damages in the second half of the century under the policy package. The benefits from (sic) mitigating climate change are expected to be particularly large for some of the countries with higher transitional costs. India is among those likely to suffer the greatest damage from global warming, reflecting its initially high temperatures. For India, the net gains from climate change mitigation — relative to inaction — would be up to 60–80% of GDP by 2100,” the report reads.

“In a scenario in which advanced economies are the only ones that reduce their gross carbon emissions by 80% by 2050, global emissions still increase to 48 gigatons by 2050, well above current levels (Figure 3.10). In contrast, if the United States, Europe, China, Japan, and India — as the five largest countries (economic region) — act together, they can make a large dent in global emissions over the next three decades,” reads WEO 2020.

Lecturing the emerging economies more on the benefits of working against global warming and climate change, the IMF says, “Keeping global temperatures to safe levels requires a global effort. Advanced economies cannot successfully mitigate climate change by themselves, as they account for a declining share of global emissions. By contrast, the five largest countries/economic union—the United States, China, the European Union, Japan, and India — acting jointly can make a large dent in global emissions. While the economic costs of mitigation vary across countries, all stand to gain greatly from avoided damages from climate change and co-benefits from mitigation, such as reduced pollution and mortality.”

Click here for the full report.

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