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By Vivek Saini
Climate change, often viewed through environmental degradation, poses an equally alarming threat to the global economy. The National Bureau of Economic Research (NBER) study, titled “The Macroeconomic Impact of Climate Change: Global vs. Local Temperature,” delves into the economic ramifications of climate change, emphasizing the profound impact of localized temperature shocks.
This study challenges the traditional focus on average global temperature increases, arguing that the economic damage from climate change has been significantly underestimated. By utilizing sophisticated economic models that account for local temperature variations, the NBER researchers reveal that a 1°C increase in global temperature could lead to a 12% decline in world GDP, with certain regions potentially facing even steeper declines exceeding 20%.
The findings underscore the uneven distribution of climate change’s economic burden, highlighting the particular vulnerability of tropical and subtropical regions to extreme weather events. The insights from the NBER study paint a dire picture, suggesting that the economic consequences of unchecked global warming could be akin to a perpetual and debilitating conflict. This calls for urgent reassessment of climate policies to mitigate these economic threats and safeguard global prosperity.
The Underestimated threat: Climate Change and the Global Economy
Climate change is often perceived as an environmental issue, threatening ecosystems and biodiversity. However, the economic consequences of climate change are equally significant and potentially even more devastating.
Dr. Amar Rao, Professor at Munjal University, stated in a conversation with CFC India, “Climate change is wielding severe economic consequences worldwide, manifested by escalating costs and disruptions across key sectors. This includes intense impacts on agriculture, where climate-induced variations in weather patterns have reduced crop yields and aggravated price uncertainty, thereby threatening global food security and economic equilibrium, especially in vulnerable regions”.
He also emphasized the increased frequency and intensity of natural disasters like hurricanes and floods are daunting direct costs from infrastructure damage and significant indirect costs due to business interruptions. Health-related economic costs are similarly substantial, as climate change intensifies the spread of diseases and increases incidents of heat-related morbidity, enacting further burdens on healthcare systems and waning labor productivity.
Additionally, Prof. Rao said, “The insurance industry, too, is wrestling with these growing challenges, facing increased premiums and decreasing insurability in areas frequently disturbed by extreme weather events. Moreover, climate change is damaging water resources, escalating challenges in agriculture, industry, and municipal supply, which can precipitate economic losses and competitive tensions”.
Here’s a breakdown of the underestimated threats climate change poses to the global economy:
Mounting Economic Losses: Due to climate change, extreme weather events like floods, droughts, and heat waves are becoming more frequent and intense. These events cause major disruptions to infrastructure, agriculture, and supply chains, leading to significant economic losses. A 2023 World Bank report estimates climate change could push over 100 million people into poverty by 2030, primarily due to climate-related shocks. The report analyzes historical climate data alongside economic models to predict the financial impact of climate change on various sectors like agriculture, health, and infrastructure.
Disrupted Supply Chains: Climate change disrupts global supply chains in several ways. Rising sea levels threaten coastal infrastructure and transportation routes, and extreme weather events can disrupt the production and transportation of goods. A report by the McKinsey Global Institute examined the growing vulnerability of global supply chains to climate disruptions. The report analyzes case studies of specific industries and regions to highlight the potential economic losses due to supply chain disruptions caused by climate change.
Reduced Productivity: Increased heat waves and changing weather patterns can negatively impact worker productivity, especially in outdoor labor sectors like agriculture and construction. A study published in Nature Climate Change, titled “The economic risks of extreme heat for global labor,” comprehensively analyzed the relationship between extreme heat events and worker productivity. The study used climate data and economic models to estimate the potential decline in global labor output due to rising temperatures.
Asia particularly affected
Prof Rao also pointed out that “the economic impact of climate change is particularly acute in Asia, projected by the Swiss Re Institute to face a GDP reduction of up to 26.5% by 2050 if global temperatures rise by 3.2°C. This scenario reflects the absence of mitigating actions and the failure to meet Paris Agreement targets. Despite substantial mitigation efforts, regions like Asia could still see significant economic contractions due to their heightened vulnerability to climate-induced disruptions.” Also, rising sea levels and more frequent coastal flooding are reshaping real estate values and urban planning, particularly in coastal zones, resulting in significant financial implications for property markets and municipal planning, he added.
Local temperature shocks can be more detrimental
The NBER study sheds light on a crucial distinction: the economic impact of climate change may vary significantly depending on the location. While global temperature increases are a concern, the study suggests local temperature shocks experienced by individual countries can be even more detrimental.
Here’s what makes the NBER study so groundbreaking:
A New Focus on Local Temperature Shocks: The NBER study argues that previous research may have underestimated the economic damage by solely focusing on average global temperature increases. They propose that local temperature shocks, often more extreme than the worldwide average, are a more accurate indicator of economic disruption. These local shocks, such as sudden heatwaves or severe droughts in specific regions, can devastate economies. The study uses sophisticated economic models that factor in these localized temperature variations.
Global vs. Local Impact: The NBER study’s findings reveal a concerning disparity. Their model suggests that a 1°C increase in global temperature might lead to a staggering 12% decline in world GDP. However, the impact on individual countries can be much more severe. The study predicts that countries experiencing extreme local temperature shocks could face even steeper declines in GDP, potentially exceeding 20% in some regions. This highlights the uneven distribution of the economic burden of climate change.
Potential Regional Disparities: The NBER study goes beyond global and local averages. It delves into potential regional disparities, suggesting that some regions may be more vulnerable to local temperature shocks, particularly those in tropical and subtropical zones. These regions are already prone to extreme weather events, and climate change could exacerbate this trend, leading to significant economic hardship.
The NBER study’s findings paint a more serious picture than previous estimates. Some experts, citing the study’s methodology, suggest the economic damage from climate change could be six times worse than previously thought. This raises concerns that if global warming continues unchecked and reaches 3°C, the economic consequences could be akin to fighting a constant, debilitating war.
From an Indian perspective
While the study provides a global perspective, Professor Shreekant Gupta from the Delhi School of Economics, while interacting with CFC India, explained how climate change’s economic grip can tighten significantly on developing countries like India. Here, we explore the fundamental mechanisms through which climate change cripples economies, with a specific focus on India’s vulnerabilities:
Agriculture: India’s agricultural sector, a vital source of livelihood for millions, faces many threats from climate change. Professor Gupta’s research highlights concerns over rising temperatures, erratic rainfall patterns leading to floods and droughts, and increased pest infestations due to warmer conditions. These factors can devastate crop yields, impact food security and livelihoods, and potentially trigger food price inflation nationwide.
Water Scarcity: Water scarcity emerges as another critical concern for India. Melting glaciers in the Himalayas, changing precipitation patterns, and increasing water demand from a growing population can lead to severe water shortages. This scarcity can cripple not just agriculture but also industry and human health.
Increased Healthcare Costs: Climate change can exacerbate existing health problems and trigger new ones. Heat stress, air pollution from wildfires, and the spread of waterborne diseases due to erratic monsoons can significantly impact India’s public health infrastructure, leading to increased healthcare costs and decreased worker productivity.
Forced Migration: Climate change can trigger mass displacement of people due to rising sea levels, extreme weather events, and desertification. With its long coastline and densely populated areas, India is particularly vulnerable. Professor Gupta highlights this in his study on adaptation challenges such displacement can put on resources and infrastructure in host communities, further disrupting local economies.
Reduced Property Values: Climate change can decrease the value of properties in areas prone to flooding, wildfires, or other climate-related disasters. This can significantly impact homeowners, businesses, and financial institutions in India. Coastal areas, already facing rising sea levels, and regions prone to extreme weather events are particularly vulnerable.
Erosion of Natural Resources: Climate change can disrupt ecosystems and damage natural resources like forests, fisheries, and freshwater supplies. These resources are essential for various economic activities in India, including tourism, forestry, and fishing. Their degradation due to climate change can lead to significant financial losses.
References:
https://www.worldbank.org/en/topic/climatechange
https://www.nature.com/articles/s41467-020-19994-1
https://www.researchgate.net/publication/366929285_Climate_change_impacts_in_India_a_review
Banner image: Photo by Towfiqu barbhuiya on Unsplash
