Responding to Climateflation, Limits of 'Monetary Policy'... What Is the Solution? [Why&Next]

Need for Alternatives to Maintain Production Despite Negative Climate Conditions
Smart Farms Recognized as Viable Alternatives for Stable Agricultural Supply
Majority of Domestic Smart Farms Remain in First Generation

[Image source=Yonhap News]

As international olive oil prices soar due to poor crop yields caused by abnormal climate conditions, domestic food companies such as CJ CheilJedang and Sempio have recently raised consumer olive oil prices. With so-called 'climateflation'?a phenomenon where agricultural production declines and prices rise due to climate change?becoming more pronounced, solutions to this issue are gaining attention.

Recently, domestic and international institutions such as the International Monetary Fund (IMF) and the Korea Development Institute (KDI) have pointed out the limitations of responding to climate change-induced inflation through monetary policy.

In its April working paper titled "The Link Between Monetary Policy and Climate," the IMF stated that it is difficult to achieve price stability through monetary policy alone under adverse climate conditions. In negative climate environments characterized by low rainfall and high temperatures, even raising the benchmark interest rate by 1 percentage point (100 basis points; 1 bp = 1 percentage point) results in only a 0.6 percentage point decrease in inflation over the next two years. Conversely, when the climate improves, a 1 percentage point increase in interest rates can reduce inflation by 1 percentage point, potentially lowering it by up to 5 percentage points over two years. In other words, there are limits to addressing climate shock-induced inflation solely through monetary policy without improving climate conditions. The report analyzed that when negative climate shocks occur, prices of food items included in the Consumer Price Index (CPI) rise due to poor crop yields, making it difficult to curb inflation through contractionary monetary policy alone.

On April 9, the KDI released a report titled "The Impact of Changing Weather Conditions on Prices and Implications," identifying recent surges in agricultural product prices as caused by climate change. The report assessed that while food price spikes due to weather shocks such as temperature and rainfall affect consumer price inflation in the short term, their impact on medium-term price trends is limited. Therefore, it emphasized that monetary policy does not need to respond sensitively to temporary price fluctuations caused by climate change.

Both reports commonly pointed out that monetary policy cannot be a fundamental solution to price surges caused by climate change. They also highlighted the need to explore other solutions to address climate change. The IMF report suggested that policies other than monetary policy, such as businesses that can maintain production under adverse climate conditions or policies that improve agricultural productivity, are necessary. The KDI report stressed the need for measures such as expanding agricultural imports or developing crop varieties suited to climate change to reduce the impact of localized weather shocks on consumer prices.

Meanwhile, Lee Chang-yong, Governor of the Bank of Korea, stated at a press conference last month, "High prices of agricultural products such as apples are influenced by climate change," pointing out the limitations of solving inflation caused by climate change through monetary and fiscal policies. Governor Lee emphasized the need for measures beyond subsidies, saying, "It is time to consider whether to continue current policies to protect producers during severe climate change or to fundamentally resolve the issue through imports."

Imports as a Short-Term Solution... 'Smart Farms' Proposed as an Alternative

So, what is the solution? While 'imports' are most frequently mentioned, they may lower prices in the short term but could shrink domestic farming and reduce food self-sufficiency in the long term. The recent rise in apple prices occurred because the supply of apples decreased more than expected due to climate change. Analysts suggest that if the climate crisis, which increases the instability of agricultural product prices, is not addressed, imports will remain only a short-term solution.

Experts say that improving farming environments using artificial intelligence (AI), such as smart farms, could be an alternative. Smart farms are farms that manage crop growth environments by integrating Fourth Industrial Revolution technologies into vinyl greenhouses and glasshouses. Smart farms are classified into first to third generations based on who makes decisions and controls operations. First-generation smart farms primarily feature 'remote facility control,' where humans handle both decision-making and control. Second-generation smart farms focus on precise growth management, with humans making decisions and computers controlling operations. Third-generation smart farms emphasize automated management, where computers make decisions and robots control operations. Currently, Korea's facility horticulture agriculture generally corresponds to the first generation. Some advanced farms have introduced second-generation equipment, and third-generation systems are being trialed mainly by research institutions.

Lee Jeong-min, a senior researcher at the Korea Rural Economic Institute, explained, "The fundamental solution to climate change is to reduce greenhouse gas emissions, but this will take a considerable amount of time. Smart farms can be an alternative to ensure stable agricultural product supply." He added, "However, smart farms may consume significant amounts of energy such as fossil fuels during operation, which could contradict the goal of reducing greenhouse gases."

There are also arguments that climate change can be addressed through market mechanisms. Na Seung-ho, Director of the Bank of Korea’s Sustainability Growth Office, recently argued in a Bank of Korea newsletter column that climate change can be tackled through solutions proposed at the global level, such as environmental taxes (carbon emission rights), mandatory climate-related disclosures, and the formation of a global climate club. In his column, Na diagnosed environmental issues as a so-called 'market failure' in economics, where efficient resource allocation fails. He stated, "Regardless of whether global warming and the climate crisis are conspiracy theories, premature hypotheses by scientists, or excuses for new trade barriers by developed countries, global-level responses have already begun." He emphasized, "The climate crisis is another economic barrier that the Korean economy, which is highly dependent on trade, must overcome."