The economic implications of climate change and water stress

1. The economic implications of climate change and water stress Carlos Gustavo Cano Global Water Sustainability (GEOGLOWS) International Business Meeting May 16- 19, 2017 NOAA/National Water Center, Tuscaloosa - AL

2. Inflation • The challenge : The nexus among Food Security, Energy, and Climate • The response: • resolution of the conflict between actual land use and agro-ecological potential • development of technology, and • environmental fiscal policy • Conclusions and recommendations

3. INFLATION Generalities to remember • The mandate of modern central banks, those that are independent of governments and follow the inflation targeting and the floating exchange rate regimes, lies in ensuring the stability of purchasing power of the currency. • Trying to grow without controlling inflation is tantamount to pursuing a spurious dividend. • Sustainability is the first and necessary element to ensure that growth translates into genuine well-being. • The “sine qua non”conditionfor growth sustainability is to guarantee low and stable inflation.

4. The objective of the monetary Policy Central Banks conducts monetary policy with the long-term goal of maintaining low, stable and, if possible, predictable inflation

5. The costs of inflation, the highest tax for the poor and the germ of inequality • It erodes the value of the currency (purchasing power). • Distributes wealth in favor of rent seekers against those who receive fixed incomes (wage earners, pensioners). • It promotes speculative investments (non-productive neither generating employment).

6. The food (and climatic) dominance of Inflation

7. In Colombia: The annual consumer inflation to January 2017 was 5.5%. It dropped from 9% in July 2016, but has remained above the upper limit of the target range (3% +/- 1%) for twenty-four months. Serious risk for its credibility. The inflation in food has been dominated by climatological factors producing supply shocks. In principle, monetary policy, designed to control demand, becomes ineffective when traying to respond to supply shocks.

8. Water stress, a sequel to climate change • 70% of the planet's water is used in agriculture, 22% in industry - particularly food and beverages - and 8% by househols. So its use is concentrated in the production of food. • Therefore, droughts or floods - caused by phenomena such as El Niño and La Niña and other climatic events -, usually lead to food shortages. The first victims: the lower classes.

9. In the face of shocks in food security and energy production • Monetary policy alone can not control food and energy inflation caused by climate change. • It is essential the concourse of environmental fiscal policies to mitigate water stress by taxing carbon emissions and, through tax credits, remunerating the provision of environmental services such as assisted natural forest restoration and avoided deforestation in head waters and basins; conservation of existing forests; reforestation and new afforestation; regeneration and conservation of biodiversity; conversion of extensive livestock to shade grazing; and expansion of drip irrigation systems.

10. Climate change, that monetary policy cannot control, would continue to reduce the agricultural frontier, especially in the tropics, and thereby increasing the persistence of the vulnerability of the poorest

11. C02 emissions from fossil fuels (84%) and deforestation (16%): curve almost identical to GDPs. The fall of 2008/10 coincides with the Great Recession. National accounts need to be changed using other indicators of economic development, such as the gap between Biocapacity and Ecological Footprint (similar to the output gap in the economy). For example, the Living Planet Index (BVI)

12. The theory of “externalities” of Arthur Cecil Pigou • According to Pigou (1877-1959), all processes of productive transformation carry costs that the markets do not incorporate into the prices of generated goods and services. This fact leads to the transfer of hidden costs to agents outside the production processes. • Its central lesson: whoever damages must pay, and whoever compensates must receive. • Moral: we must reinvent private and public accounting by incorporating the true costs of growth regarding the detriment of natural capital, through a system of environmental taxation, penalizing those who damage and compensating those who benefit.

13. According to FAO-OECD, in the medium term, as the global economy growth resumes, the challenge for survival will persist • In order to meet the world demand for food in 2050, with a population close to 10 billion, production would have to increase 70% compared to 2009. • In order to achieve this, with the same yields of today, it would be necessary to add 1.0 billion hectares to the current frontier of 1.5 billion. • However, with today's technologies we could only count with 70 million new hectares. The rest will have to come from great leaps in productivity, as happened during the last half century of history.

14. Where should we expand research under GEOGLOWS • Africa and Latin America have most of the apt land for agricultural production. However, its viability will depend on: • (A) Water availability. • (B) Change for effective land use. • (C) Development of botanical 'genomics' and genetic engineering, and the production of improved varieties resistant to drought and tolerant to salinity and acid soils.

15. The ultimate goal: the expansion and conservation of bio-capacity, which is the key to food security • Tax credits on carbon taxes (and rural property taxes) to those who invest in the following areas: • Natural forest assisted regeneration • Standing forest conservation • Avoided deforestation, reforestation and afforestation • Regeneration and conservation of biodiversity • Livestock reconversion to silvo-pastoral methods • Increment of drip irrigation

16. Conclusion and Recommendations • In the face of climate variations, the laissez-faire, (markets without environmental adjustment policies) would lead to global deterioration of social and economic conditions of next generations. • Immediate intervention is decisive, necessary, and urgent. Avoiding this responsibility would generate enormous inter-generational costs.