The Climate Crisis Is Also an Inflation Crisis

Jan 4 , 2025
By Monica Araya , Saliem Fakir

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The climate crisis needs a global response. Policymakers can develop strategies linking climate and economy, reducing the immediate risks posed by extreme weather and promoting long-term stability. In this commentary provided by Project Syndicate (PS), Monica Araya, a distinguished fellow at ClimateWorks and the director of the Governing Board of the Natural Resource Governance Institute, and Saliem Fakir, the founder and executive director of the African Climate Foundation, argue that the urgency of climate crisis only grows as the planet and inflation continue to heat up.

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Global inflation in recent years has pushed the prices of food, energy, and basic goods to unprecedented levels. As a result, the rising cost of living has dominated political discussion around the world, but especially in G20 countries. Ahead of this year's presidential election in the United States, for example, 41pc of Americans cited inflation as their top economic issue.

High inflation risks overshadowing another urgent crisis in global warming. But rising prices and climate change are closely linked. Extreme weather damages crops, spoils harvests, and drives up food prices, and its impact is growing more pronounced as heatwaves, droughts, and floods become more frequent and intense. These events also disrupt supply chains and energy production, pushing up the price of other essential goods.

Climate-induced inflationary pressures are especially acute in Africa and Latin America, where food accounts for a significant share of household spending. For example, an extensive drought exacerbated by El Nino raised the price of staples in Malawi, Mozambique, Zambia, and Zimbabwe earlier this year, creating a hunger crisis. By contrast, households in wealthier countries tend to spend a smaller share of their income on food and are thus better insulated.

Discussions about climate change often overlook its economic toll on vulnerable populations and how it deepens inequality, focusing instead on green growth and emissions reductions. But as inflation increasingly disrupts economic stability, this toll can no longer be ignored. Shifting weather patterns have raised the prices of oranges in Brazil, cocoa in West Africa, and coffee in Vietnam. A recent study by the Potsdam Institute for Climate Impact Research and the European Central Bank estimates that rising temperatures could drive up food inflation by 3.2 percentage points per year, with overall inflation increasing by 1.18 percentage points annually by 2035.

Climate change should be central to economic policy rather than being treated solely as an environmental issue. Fiscal and monetary authorities should incorporate immediate and long-term climate-related risks into their inflation forecasts and policies – as they already do with the "transition risks" of shifting to a low-carbon economy. Some institutions have begun to adapt.

The South African Reserve Bank has acknowledged the importance of understanding climate risks. Since 2018, the Central Bank of Costa Rica has integrated the impact of global warming into its economic models.

Central banks and finance ministries should also work with climate organisations to create practical solutions that help cushion economies from the interrelated shocks of extreme weather, soaring inflation, and food insecurity. For example, the African Climate Foundation (where one of us works) has developed Adaptation & Resilience Investment Platforms (ARIPs), which use advanced analytics that combine climate and weather data, biophysical models, and economy-wide models to facilitate investment and policy prioritisation, a more comprehensive approach to building resilience.

The ACF used an ARIP in Malawi last year, after the country was devastated by Cyclone Freddy, the longest-lasting tropical cyclone ever recorded. Using this financial tool enabled policymakers to identify lasting solutions that would mitigate the economic damage caused by the cyclone while protecting key industries and strengthening financial stability. Other climate think tanks are pursuing similar goals. Iniciativa Climatica de Mexico is pushing policymakers to consider climate risks in economic planning, while the Institute for Climate & Society in Brazil has called for social-protection plans and climate-sensitive policies to shield low-income communities from the economic consequences of extreme weather.

Equally important is regional collaboration, which would allow countries in Africa and Latin America to develop and share economic policies that are specifically tailored to their climate vulnerabilities and support the most exposed communities. Initiatives like the Inter-American Development Bank's Regional Climate Change Platform of Economy and Finance Ministries can serve as a blueprint for such efforts.

Greater coordination between climate and economic institutions is crucial at the global level. Tools like the European Union's Carbon Border Adjustment Mechanism highlight the need for careful policy design to mitigate adverse effects – in this case, higher costs for consumers in developing countries. Brazil, as the host of next year's BRICS Summit and United Nations Climate Change Conference (COP30), and South Africa, as the current G20 president, have a unique opportunity to redefine the global economic agenda, championing policies that address the twin crises of inflation and global warming.

Failure to act collectively and decisively could deepen inequality, erode economic stability, and jeopardize climate goals. But, if policymakers develop innovative solutions that bridge the gap between climate and economic strategies, they can reduce the immediate risks of extreme weather and foster long-term stability and resilience. As inflation and the planet heat up, the need for integrated, equitable policies has never been more urgent.

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PUBLISHED ON Jan 04,2025 [ VOL 25 , NO 1288]

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