ARGUMENT: CLIMATE & THE ECONOMYWeather Is Again Determining Economic Outcomes
Europe’s energy crisis has brought the return of weather-based economics. “The crisis is a reminder that, for all their technological sophistication, even rich-world economies must rely on the munificence of nature,” the Economist writes, adding that “in the absence of a transition to green forms of energy the weather would begin to play an even bigger role in economics.”
Europe’s energy crisis has brought the return of weather-based economics. “The crisis is a reminder that, for all their technological sophistication, even rich-world economies must rely on the munificence of nature,” the Economist writes, adding:
European economists, financiers and policymakers are watching forecasts closely: a balmy winter will bring relief, requiring less gas to be burned in order to keep houses warm. If temperatures are not too punishing, energy prices will fall and growth be given a boost. A frosty winter, on the other hand, will bring misery: pushing millions into poverty, increasing inflationary pressures and keeping industries shuttered.
Fossil fuels originally promised to free economies from the vagaries of the seasons. Instead of relying on ambient solar power—captured in grain, preserved in livestock or photosynthesised into biomass and then consumed as firewood—humanity could burn coal, releasing the prehistoric solar power contained within. The use of fossil fuels allowed energy to be stored, transported and released exactly when required. They placed the power of the sun at the beck and call of mankind, rather than the other way around.
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Yet in the absence of a transition to green forms of energy the weather would begin to play an even bigger role in economics. A warmer planet is already leading to more frequent and extreme events, such as Europe’s summer heatwaves or the devastating floods endured by Pakistan. These events amount to so-called real shocks to an economy: external changes that lower productive capacity, and so cause both higher inflation and unemployment.
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According to analysis by the IMF of Pacific and Caribbean islands, natural-disaster-prone countries grow by around one percentage point less a year and have considerably higher debt stocks than those less at risk. Climate change will only exacerbate these differences. Thus a return to weather-dependent economics will leave some central bankers looking even more like rainmakers: attempting to perform the old rituals or demanding more sacrifices, without much capacity to affect the economic weather.
