Transition to a greener economy: Climate change risks and resilience in a state-space framework

Transitioning to a low-carbon economy is a long and challenging process requiring a well-planned policy mix to achieve net-zero emissions. This paper proposes a country-agnostic, empirical framework to analyse a country's preparedness for mitigating climate change risks. Utilizing a dynamic factor model (DFM), we create composite indices to measure climate change 'exposure' and 'resilience' by integrating diverse datasets on renewable and non-renewable production, energy consumption, structural and economic factors. Further, we employ a flexible 'predatorprey' species interaction model to capture the dynamic interaction between exposure and resilience. We apply our proposed framework in the context of India, a large developing economy. Our analysis indicates that, while India's climate change exposure has declined relative to the world, its resilience towards climate change has significantly diminished over time. We also find that an increase in resilience leads to a direct decline in future exposure to climate change. Our framework underscores the need for policies that foster climate change resilience such as expanding renewable energy production, ensuring accessible finance for the renewables sector, developing climate financing infrastructure and increasing investment in research and development for a smoother transition.