The Cost of Climate Change: Economic impact of Climate change

 "The bottom line is, when we damage the natural world, we damage ourselves", said Sir. David Attenborough,the renowed natural historian and broadcaster, in a talk with former IMF Managing Director, Christine Lagarde. In his statement, Attenborough was hinting at the symbiosis that the environment and the economy share. Analysis by IMF experts suggests that a persistent increase in average global temperature by 0.04°C per year, in the absence of mitigation policies, reduces world real GDP per capita by over 7% by 2100. On the other hand, abiding by the 2015 Paris agreement, which was designed to prevent global temperature from rising by more than 2°C above pre industrial levels, limits the increase to 0.01°C per annum, reduces the loss substantially to about 1%, subject to the pace of temperature increase and variability of climate conditions.

Relative impact of climate change falls as per capita income rises, ie. lesser the poverty, lesser the vulnerability to adverse effects of climate change. This indicates that poorer and developing countries are notably more vulnerable to climate change than richer ones. Most developed economies are founded on industrialisation and fuelled by the tertiary sector, whereas developing economies rely on climate dependent primary sector and hence, are increasingly vulnerable to unfavourable climate conditions. Most of the developing world is located around the hotter regions and have limited adaptive capacity and hence if these hotter regions become even hotter, consequences can be catastrophic.

Findings above suggest that climate change obviously aggravates inequality, both economic and social as uneven impacts cause poorer nations to become poorer. Impact of climate change is greatly influenced by where people live and what kind of jobs they have. Low lying, flood prone areas are particularly at risk of becoming inhabitable because of increasing temperature and resultant sea level rise. Huge shifts in geography, demographics and technology are inevitable and adaptation will probably be easier for the affluent than the poor.

Climate change is accompanied by both manageable and catastrophic costs (like food shortage and climate refugees). A compromise on productivity of labour will considerably contract supply of necessities.

Sector Specific Impact

Agriculture: Agriculture is most vulnerable to climate change. Flooding and severe heat cause yields to contract considerably. According to a 2011 National Academy of Sciences report, for every degree celsius the global thermostat rises, there will be a 5 to 15 % decrease in overall crop production. Fall in ground water levels,increased use of pesticides and fertilisers to maintain production levels along with fall in productivity might cause prices to rocket in the near future

Infrastructure: Sea level rise is the prominent threat to this sector. It has potential to cause a loss in value of assets in trillions of dollars by the century. As concerns the communication sector, a 2018 study found that over 4000 miles of fiber optic cable as well as data centres, traffic exchanges and termination points - the lifeblood of the global information network- are at risk from sea level rise.

Businesses and Financial Markets: Climate change can directly affect factories, supply chain, transport etc. It can lead to obsolescence of industries like mining, increased cost of raw materials, and resultant uncertainty in stock prices. Investment in stock of natural resources like coal, oil, gas etc. will contract in the short run.

Social cost of Carbon :

Essentially, it indicates the incremental impact of emitting an additional ton of carbon dioxide or the benefit of slightly reducing emissions.

Pigou tax ( amount of greenhouse gas emissions that should be taxed in order to maximise welfare), Carbon dividends ( proceeds from the carbon tax, which would be distributed to consumers) etc. are steps taken towards engaging the corporates in the fight against climate change, by making the "polluter pay".

Current climate policy falls woefully short of achieving ends, mostly because of its flawed means - its estimates of social cost of carbon underestimate the true risk of climate change, it relies primarily on incomplete impact assessments and is partly determined by ethical parameters like the rate of pure time preference, risk aversion, inequality aversion. Unrealistic assumptions of the model and complexity in computation of social cost impact climate policy adversely as it is channeled through estimates of social cost of carbon.

Investment in Green infrastructure and resilient coastal infrastructure would create jobs. Appeal of hybrid and electric vehicles is on the rise and these could be incorporated into public transport. Government should take proactive steps to increase investment in resiliency building initiatives. In the words of Joseph Stiglitz, a nobel prize recipient,

" We will pay for climate breakdown one way or another, so it makes sense to spend the money now to reduce emission rather than wait until later to pay a lot more for the consequences. It's a cliche, but it's true : An ounce of prevention is worth a pound of cure".

Economic impact will be profound and is likely to affect everyone, albeit in different degrees. Awareness and voluntary action is the need of the hour. Doing our part for the burning out planet is much easier and influential than mindless persuasion of the majority to get their priorities straight. People are not easily convinced about climate change, because, quoting Joseph Aldy (Professor, Harvard's Kennedy School for Public Policy), " It's really hard to convey something that is long term and gradual until it is not".

Sources:

blogs.ei.columbia.edu

The NewYork Times

academia.oup.com - Oxford Academic

imf.org

PS: Originally written for Synergy (Newsletter, ARSD college)