Climate Change to Shrink Global Economy

“Without mitigation and adaptation policies, many countries are likely to experience sustained temperature increases relative to historical norms and suffer major income losses as a result. This holds for both rich and poor countries as well as hot and cold regions.”

“Canada is warming up twice as fast as rest of the world. There are risks to its physical infrastructure, coastal and northern communities, human health and wellness, ecosystems and fisheries – all of which has a cost,” he said. 

“The UK recently had its hottest day on record. Train tracks buckled, roads melted, and thousands were stranded because it was out of the norm. Such events take an economic toll, and will only become more frequent and severe without policies to address the threats of climate change.”

Mohaddes worked on the study with Cambridge PhD candidate Ryan Ng, as well as colleagues from the University of Southern California, USA, Johns Hopkins University, USA, National Tsing Hua University, Taiwan, and the International Monetary Fund.

Using data from 174 countries dating back to 1960, the research team estimated the link between above-the-norm temperatures and income levels. They then modelled the income effects under a continuation of business-as-usual emissions as well as a scenario in which the world “gets its act together” and holds to the Paris Agreement.

Researchers acknowledge that economies will adapt to changing climates, but argue that their modelling work shows adaptation alone will not be enough.  

The scientific consensus suggests that adapting to climate change takes an average of 30 years, as everything from infrastructure to cultural practice slowly adjusts. But even if this adjustment speeds up to just 20 years, the United States still loses almost 7 percent of its economy, with over 4 percent of global GDP gone by the century’s end. 

The team also undertook a more focused approach to the U.S. to gauge the strength of their results. “Cross-country studies are important for the big picture, but averaging data at national levels leads to loss of information in geographically-diverse nations, such as Brazil, China or the United States,” said Mohaddes.     

“By concentrating on the U.S., we were able to compare whether economic activity in hot or wet areas responds to temperature fluctuations around historical norms in the same way as that in cold or dry areas within a single large nation.”

They looked at ten sectors ranging from manufacturing and services to retail and wholesale trade across 48 U.S. states, and found each sector in every state suffered economically from at least one aspect of climate change – whether heat, flood, drought or freeze.   

When scaled up, these are the effects that will create economic losses at the national and global levels, even in advanced and allegedly resilient economies, say the researchers. 

“The economics of climate change stretch far beyond the impact on growing crops,” said Mohaddes. “Heavy rainfall prevents mountain access for mining and affects commodity prices. Cold snaps raise heating bills and high street spending drops. Heatwaves cause transport networks to shut down. All these things add up.”

“The idea that rich, temperate nations are economically immune to climate change, or could even double and triple their wealth as a result, just seems implausible.”

Mohaddes is from Sweden, which some predict will benefit from higher temperatures. “But what about the winter sports depended upon by the Swedish tourism industry?”

“If advanced nations want to avoid major economic damage in the coming decades, the Paris Agreement is a good start.”