COP21

In December 2015, world leaders, leading scientists, policy makers, and activists convened in Paris for the United Nations Climate Change Conference, or COP21, to draft a plan to combat climate change. In the Paris Agreement drafted at the conference,  several countries agreed to set targets for emissions reduction and increase funding for renewable energy technologies, such as solar panels and hydropower, to ensure that the Earth’s average temperature would not rise beyond 2 degrees Celsius over pre-industrial levels by the end of the century. While many hailed the agreement as a success, there are arguments about the effect of the agreement on the global economy. Some argue that imposing more regulations on businesses will drive down profitability. On the other hand, arguments have been made that without these targets, sea levels will rise and make some regions of the planet uninhabitable, so stringent regulations must be put in place to force companies to comply. The issue is very complex and requires looking at climate change as a whole and the proposed solutions.

Last October, a team of researchers from Stanford University evaluated the effect of climate change on future GDP growth. Looking at historical productivity data from countries around the world, the researchers split productivity into two categories, agricultural and non-agricultural, to determine the economic impact of global warming. The researchers determined that in the year 2100, global GDP will be 23% lower than it would be without any global warming due to declined economic productivity.  The study concluded that there would be lower crop yields if natural growing temperatures rose, but the Stanford researchers were unable to conclude why worker productivity declined when temperatures rose. Additionally, the results, which were published in Nature, did not take into account the effect of factors such as a rise in sea levels and increased storms, which would further decrease global GDP. An increase in catastrophic events would insert more uncertainty into the global economy and could lead to further economic decline both in developed and underdeveloped nations.

This realization has not gone unnoticed by large corporations, which are seeking to minimize their losses from future natural disasters. Citigroup released an internal report that cited the reduction in company losses by mitigating climate change. The report stated that if global warming were reduced to 1.5 degrees Celsius from its current projection of 4.5 degrees Celsius in 2100, global GDP would be 50 trillion dollars higher. This result was partially validated by a report issued by the Intergovernmental Panel on Climate Change (IPCC), which managed to conclude in 2014 that there was more than a 50% chance that aggregate losses from climate change would be greater than 2% of global GDP by the end of the century. Also in 2014, a report from the Carbon Disclosure Project showed that out of 2000 companies surveyed, 44% of them had suffered a production disruption from weather-related issues, such as increased rainfall or severe drought, and 31% of companies were facing increased costs. A real-life example was the 2011 flood in Thailand, which according to an article by Diana Liverman and Amy Glasmeier in The Atlantic, resulted in economic losses of 45 billion dollars. Numerous companies were forced to scale back development in Southeast Asia, and the effect of the disaster was felt worldwide in terms of increased prices. Another potential economic setback would be an increase in income inequality among nations. The Stanford study noted that optimal economic productivity occurs when the average temperature is 55 degrees Celsius, so if temperatures continue to rise, this would theoretically reduce the productivity of tropical areas and increase the productivity of the Northern European countries, further driving a wedge in regional economic growth.

While these results appear to indicate a largely negative economic impact as a result of severe climate change, there is evidence indicating a more complex story. The IPCC researchers who forecasted large aggregate losses by 2100 also concluded that the impact of climate change on the global economy would be less than the impacts of new technology and population change. In other words, while climate change has the capability to diminish profitability, new technology and changes in education levels, infrastructure, and human settlements could result in higher net profits. Improvements in current technology have the ability to cut costs dramatically at large manufacturing companies, and with the current pace of technological advancement, operating costs continue to decrease substantially every year. In addition, underdeveloped nations in Asia, Africa, and South America will provide more consumers and producers to the global economy, driving up innovation, spending, and ultimately GDP.

While both the IPCC researchers and the Stanford researchers concluded that agriculture would be one of the hardest-hit industries as a result of global warming, both the effect of climate change on agriculture and its implications for the global economy remain unclear. Agriculture currently occupies 3% of the global economy, and the industry has been in constant decline due to the emergence of new technologies that are eliminating the need for increased manpower. In addition, a temperature increase could render previously useless areas more suitable for farming and would not necessarily lead to a shortage in food commodities. In fact, research conducted in 2007 by Olivier Deschênes GS ‘01 and Michael Greenstone GS ‘98 concluded that global warming will increase agricultural productivity in the United States. Deschênes and Greenstone showed that as a result of global warming, there will be an increased growing season and precipitation, which will result in as much as a 4% increase in crop yields. More interesting was the fact that even a large increase or decrease in temperature, such as 5 degrees Fahrenheit, would leave agricultural productivity relatively unchanged and would even modestly increase productivity if temperatures increased. Research done by Richard Tol at Sussex University builds upon this theory, which states that global warming increased living standards and human welfare throughout the 20th century, but Tol adds that human welfare will decline after around 2080. Additionally, several other studies have drawn found that an increase in greenhouse gases has contributed to increased plant growth, especially in historically impoverished areas like sub-Saharan Africa. Global warming could also reduce energy costs, especially in areas currently with colder climates, and simultaneously decrease winter-related deaths.These results directly contradict the research done by the Stanford group, demonstrating that even in the scientific community, there is very little clear consensus as to the effects of climate change on the environment and the economy.

In terms of non-agriculture industries, IPCC was unable to determine the impact of climate change while the Stanford researchers cited a decrease in productivity. Once again, the effect of new technologies could increase productivity in certain industries and may prove economically beneficial. For example, Starbucks is working on adapting coffee plantations to warmer temperatures, and Levi Strauss is focusing on minimizing water use in cotton production. Efforts by the private sector to respond to climate change have resulted in new innovations designed to cut costs and grow profits, mitigating the effects of warmer temperatures. In their article for The AtlanticLiverman and Glasmeier also point out that there are very few models displaying the economic effects of climate change and suggest that since the majority of this type of research is being conducted by corporations, there is an implicit bias towards data that encourages governments to act to slow down climate change.

Clearly, there does not appear to be much consensus over the supposed economic impact of climate change and global warming. Much of this stems from a lack of conclusive scientific data regarding climate change economics and science. The only way to currently measure economic impacts is by using historical data and extrapolating, which can lead to a wide range of models and conclusions. While the economic negatives of climate change are frequently in the public spotlight, the economic positives and objections to the economic models rarely enter the forum. In order to develop the best solutions to minimize the costs, it is necessary to take a look at all the data provided instead of cherry-picking statistics that support our personal opinions or vested interests. Climate change and global warming are two important and not very well-understood issues, and we need to make sure governments and policy-makers take all the evidence into consideration before making sweeping policy changes that could affect global economic growth in the coming decades.

Abhiram Karuppur is a freshman writer from New Jersey. He joined The Financier this fall. Please reach out to karuppur@princeton.edu for any questions, comments, or concerns.

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