Daily Times

According to Pakistan’s Bureau of Statistics (PBS), inflation has surged to a record 36.4 per cent, driven primarily by soaring food and energy prices. This makes the inflation rate the highest in South Asia, with rural areas experiencing food inflation reaching 40.2 per cent. Despite contractionary monetary policy by the central bank, inflation has not decreased. However, the finance ministry hopes that successful talks with the International Monetary Fund could stabilize the exchange rate and alleviate inflationary pressures.

Macroeconomics identifies various types of inflation that can impact an economy in different ways, even though the theory does not follow a particular order. All these types of inflation have been observed in Pakistan’s economy. Excessive demand for goods and services due to rising population, urbanization, and the growing middle class has triggered demand-pull inflation. High energy prices and increasing production costs have caused cost-push inflation. Built-in inflation has been a result of past inflation leading to an increase in wages, causing businesses to increase their prices to maintain their profits. The economy has experienced stagflation due to a combination of high inflation and stagnant economic growth. Structural inflation has occurred because the supply side of the economy is not functioning optimally. Open inflation has been driven by the devaluation of the national currency, leading to an increase in import prices and subsequently domestic prices. Finally, hidden inflation has been caused by underreporting or misreporting of inflation rates by the government. The presence of all these types of inflation in Pakistan’s economy highlights the challenges the country is facing in maintaining price stability and achieving sustainable economic growth. The major reasons for inflation include rising imports, the balance of payments crises, rising global commodity prices, volatile global energy prices due to the Russia-Ukraine Conflict, low yield due to climate change-induced disasters, and political instability.

The persistent nature of high inflation has caused significant lifestyle and consumption changes.

This article discusses a potential way forward to reduce inflationary pressure through an integrated approach of (Political) Economy-Energy-Environment Nexus under the constitutional arrangements for sustainability and long-term applicability. Thus, the persistent nature of high inflation has caused significant lifestyle and consumption changes. Pakistan may require legislation to integrate energy and environment solutions into an inflation reduction act, similar to that of the USA, to tackle the root causes of inflation.

On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law, which aims to reduce inflation, but also has the potential to significantly curb greenhouse gas emissions (GHG) over the next few years. This act is considered to be the most meaningful climate bill ever passed in the US, with a focus on incentivizing green energy and sustainable environmental practices to reduce inflation. The Act incentivizes multiple sources of clean energy, including energy storage, nuclear power, clean energy vehicles, hydrogen, and Carbon Capture Utilization and Storage (CCUS), as long as they are carbon neutral. This “source agnostic” approach reduces the risks associated with picking technology winners and focuses on reductions in GHG emissions linked to energy production.

The Inflation Reduction Act is socially progressive and promotes sustainable jobs, worker training, and apprenticeship programs. It also prioritizes the needs of environmental justice communities and recognizes their unique challenges in accessing clean energy and other resources. The enactment of the Inflation Reduction Act is a significant step towards achieving the US’s climate goals and setting a new standard for climate policy in the country. It is expected to have far-reaching impacts on the economy, public health, and the environment, and marks a turning point in the US’s transition to a sustainable, low-carbon future.

Given this act, a suggested roadmap for Pakistan’s political leadership and legislative bodies is to follow an integrated approach of (Political) Economy-Energy-Environment nexus under the constitutional arrangements for sustainability and long-term applicability. This approach will help Pakistan tackle its 3Es crises of (Political) Economy-Energy-Environment and promote sustainable economic growth.

Although The Inflation Reduction Act (IRA) cannot be generalized to Pakistan, it does provide us with key findings that offer several recommendations for developing countries, particularly Pakistan. Here are some of these recommendations: First, prioritize Clean Energy and Climate Change Mitigation. Developing countries need to prioritize clean energy and climate change mitigation initiatives to reduce greenhouse gas emissions. This can be achieved by investing in renewable energy sources such as solar, wind, and hydro, as well as incentivizing clean energy production through tax credits.

Secondly, focus on sustainable transportation. Pakistan’s dependence on petroleum products for its transportation sector is both financially burdensome and environmentally unsustainable. The country spends a staggering $15 billion annually on petroleum products for transportation alone, a significant portion of its overall import bill. This heavy reliance on fossil fuels has not only contributed to the country’s balance of payments issues but also resulted in severe environmental degradation and public health hazards. To ensure a sustainable economy, Pakistan must transition towards sustainable transportation solutions and promote a shift in behaviour towards more environmentally friendly modes of travel, such as public transportation, electric vehicles, and cycling. A reduction in the consumption of petroleum products in the transportation sector will lead to significant financial savings for the country and reduce its carbon footprint, resulting in a cleaner and healthier environment for its citizens.

Thirdly, adopt a Source-Agnostic Approach. Developing countries should adopt a source-agnostic approach that reduces the risks associated with picking technology winners. Instead of relying on a single solution, they should focus on reducing GHG emissions linked to energy production and consider multiple sources of clean energy, including energy storage, nuclear power, clean energy vehicles, hydrogen and CCUS, so long as they are carbon neutral. Fourthly, promote Socially Progressive Policies. Developing countries should promote socially progressive policies that prioritize workers’ rights and wages. They should award higher incentives to projects implemented by workers paid increased wages, as most of the tax credits available provide for a base tax credit that has the potential to be multiplied by five where the taxpayer complies with the prevailing wage and apprenticeship requirements.

Fifthly, develop Clean Hydrogen Production. Developing countries should develop clean hydrogen production to reduce emissions from energy-intensive industries such as iron, steel, cement, and chemical production. They can provide incentives for the production of green hydrogen with a carbon intensity within the range of 0-0.45 kilogram of CO2 equivalent (CO2e) per kilogram of hydrogen (H2) while mandating a well-to-gate approach to measure the lifecycle emissions. Sixthly, invest in Hard-to-Abate Industries. Developing countries should invest in industries that are either energy-intensive or produce hard-to-abate emissions, such as iron, steel, cement, and chemical production. They can create programs and provide funding to retrofit facilities and incentivize the use of clean energy sources.

Seventhly, address Methane Emissions. Developing countries should take steps to address methane emissions from upstream oil and gas activities. They can provide funding to support monitoring and methane reduction efforts, similar to the Methane Emissions Reduction Program established by the IRA. Eighthly, foster International Cooperation. Developing countries should foster international cooperation to address climate change. They can collaborate with other countries to share best practices, technology, and funding to reduce greenhouse gas emissions and promote sustainable development.

Ninth, Pakistan, like many other countries, faces the challenge of reducing its carbon footprint to address the pressing issue of climate change. To address this, implementing a carbon tax could prove to be a viable solution. By placing a tax on carbon emissions, businesses and individuals will be incentivized to reduce their carbon footprint, leading to a reduction in overall emissions. Additionally, the revenue generated from the carbon tax can be used to fund green initiatives such as renewable energy projects and sustainable transportation. Furthermore, a carbon credit system can also be implemented, allowing businesses that reduce their emissions below the baseline to earn credits that can be sold to other companies that exceed their emissions limit. This creates a market incentive for companies to reduce their emissions while also generating economic benefits. Overall, implementing a carbon tax and credit system can have significant economic gains while also promoting sustainable practices and reducing the carbon footprint in Pakistan.

Lastly, it’s crucial to weave green, sustainable energy and climate solutions into Pakistan’s economic and political fabric. With the current political and economic turmoil, we need to create an Economy-Energy-Environment charter that views the sustainability of our economy through an energy and climate change lens and enacts permanent policies.

In conclusion, Pakistan’s persistently high inflation poses a serious threat to the country’s economy and its population. A comprehensive approach that integrates the economy, energy, and environment is essential to tackle this issue effectively. However, implementing such an approach would require concrete constitutional arrangements, including legislation and political stability. In addition, financing the Inflation Reduction Act would require stronger climate solutions-based diplomacy. As Pakistan continues to grapple with economic turmoil and inflationary pressures, it is crucial that the government takes bold steps to address these challenges and secure a stable economic future for the country that integrates economic policy with green energy and sustainable environment as well.”

The writer is associated with SDPI as an energy consultant. He can be reached at khalidwaleed@sdpi.org and tweets @Khalidwaleed_