Economic impacts of climate change
Encyclopedia
This article describes the economic impacts of climate change
.
s, are more difficult to calculate. Other difficulties with impact estimates are listed below:
In a literature assessment, Smith et al. (2001:957-958) concluded, with medium confidence, that:
With high confidence, it was predicted that with a medium (2-3 °C) to high level of warming (greater than 3 °C), negative impacts would be exacerbated, and net positive impacts would start to decline and eventually turn negative.
(CO2) from pre-industrial levels conclude that this would have a slightly negative to moderately positive aggregate
effect (i.e., total impacts across all regions) on the agricultural sector (Smith et al., 2001:938). This aggregate effect hides substantial regional differences, with benefits mostly predicted in the developed world and strongly negative impacts for populations poorly connected to regional and global trading
systems.
, forestry
, and fisheries
industries. Other sectors sensitive to climate change include the energy
, construction
, insurance
, tourism
and recreation
industries. The aggregate impact of climate change on most of these sectors is highly uncertain (Schneider et al., 2007:790).
Smith et al. (2001) assessed the literature on the aggregate impacts of climate change. With medium confidence, they concluded that a small increase in global average temperature (up to 2 °C, measured against 1990 levels) would result in an aggregate market sector impact of plus or minus a few percent of world GDP. Smith et al. (2001) found that for a small to medium (2-3 °C) global average temperature increase, some studies predicted small net positive market impacts. Most studies they assessed predicted net damages beyond a medium temperature increase, with further damages for greater (more than 3 °C) temperature rises.
With low confidence, Smith et al. (2001) concluded that the non-market impacts of climate change would be negative. Smith et al. (2001:942) decided that studies might have understated the true costs of climate change, e.g., by not correctly estimating the impact of extreme weather
events. It was thought possible that some of the positive impacts of climate change had been overlooked, and that adaptive capacity had possibly been underestimated.
Some of the studies assessed by Schneider et al. (2007:790) predicted that gross world product
could increase for 1-3 °C warming (relative to temperatures over the 1990-2000 period), largely because of aggregate benefits in the agricultural sector. In the view of Schneider et al. (2007), these estimates carried low confidence. Stern (2007) assessed climate change impacts using the basic economics of risk premium
s (Yohe et al., 2007:821). He found that unmitigated climate change could result in a reduction in welfare
equivalent to a persistent average fall in global per-capita consumption
of at least 5%. The study by Stern (2007) has received both criticism and support from other economists (see Stern Review
for more information). IPCC (2007a) concluded that "Aggregate estimates of costs mask significant differences in impacts across sectors, regions and populations and very likely underestimate damage costs because they cannot include many non-quantifiable impacts."
of carbon (SCC) is an aggregate measure of the impacts of climate change. It is defined as the incremental (or marginal
) social cost of emitting one more tonne of carbon (as carbon dioxide) into the atmosphere at any point in time (Yohe et al., 2007:821). Different GHGs have different social costs. For example, due to their greater physical capacity to trap infrared radiation, HFCs have a considerably higher social cost per tonne of emission than carbon dioxide. Another physical property that affects the social cost is the atmospheric lifetime of the GHG.
Estimates of the SCC are given in the carbon tax article. These estimates are highly uncertain and cover a wide range (Klein et al., 2007:756). The discrepancies in estimates can be broken down into normative
and empirical
parameters (Fisher et al., 2007:232). Key normative parameters include the aggregation of impacts across time and regions. The other parameters relate to the empirical validity of SCC estimates. This reflects the poor quality of data on which estimates are based, and the difficulty in predicting how society will react to future climate change. In a literature assessment, Klein et al. (2007:757) placed low confidence in SCC estimates.
allows assumptions to be changed in aggregate analysis to see what effect it has on results (Smith et al., 2001:943):
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
.
Distribution of impacts
Climate change impacts can be measured as an economic cost (Smith et al., 2001:936-941). This is particularly well-suited to market impacts, that is impacts that are linked to market transactions and directly affect GDP. Monetary measures of non-market impacts, e.g., impacts on human health and ecosystemEcosystem
An ecosystem is a biological environment consisting of all the organisms living in a particular area, as well as all the nonliving , physical components of the environment with which the organisms interact, such as air, soil, water and sunlight....
s, are more difficult to calculate. Other difficulties with impact estimates are listed below:
- Knowledge gaps: Calculating distributional impacts requires detailed geographical knowledge, but these are a major source of uncertainty in climate modelClimate modelClimate models use quantitative methods to simulate the interactions of the atmosphere, oceans, land surface, and ice. They are used for a variety of purposes from study of the dynamics of the climate system to projections of future climate...
s. - Vulnerability: Compared with developing countries, there is a limited understanding of the potential market sectorMarket sectorThe term market sector is used in economics and finance to describe a set of businesses that are buying and selling such similar goods and services that they are in direct competition with each other...
impacts of climate change in developing countries. - Adaptation: The future level of adaptive capacity in human and natural systems to climate change will affect how society will be impacted by climate change. Assessments may under- or overestimate adaptive capacity, leading to under- or overestimates of positive or negative impacts.
- Socioeconomic trends: Future predictions of development affect estimates of future climate change impacts, and in some instances, different estimates of development trends lead to a reversal from a predicted positive, to a predicted negative, impact (and vice versa).
In a literature assessment, Smith et al. (2001:957-958) concluded, with medium confidence, that:
- climate change would increase income inequalities between and within countries.
- a small increase in global mean temperature (up to 2 °C, measured against 1990 levels) would result in net negative market sector impacts in many developing countries and net positive market sector impacts in many developed countries.
With high confidence, it was predicted that with a medium (2-3 °C) to high level of warming (greater than 3 °C), negative impacts would be exacerbated, and net positive impacts would start to decline and eventually turn negative.
Non-market impacts
Smith et al. (2001:942) predicted that climate change would likely result in pronounced non-market impacts. Most of impacts were predicted to be negative. The literature assessmented by Smith et al. (2001) suggested that climate change would cause substantial negative health impacts in developing countries. Smith et al. (2001) noted that few of the studies they reviewed had adequately accounted for adaptation. In a literature assessment, Confalonieri et al. (2007:415) found that in the studies that had included health impacts, those impacts contributed substantially to the total costs of climate change.Agriculture
Depending on underlying assumptions, studies of the economic impacts of a doubling in atmospheric carbon dioxideCarbon dioxide
Carbon dioxide is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom...
(CO2) from pre-industrial levels conclude that this would have a slightly negative to moderately positive aggregate
Aggregate data
In statistics, aggregate data describes data combined from several measurements.In economics, aggregate data or data aggregates describes high-level data that is composed of a multitude or combination of other more individual data....
effect (i.e., total impacts across all regions) on the agricultural sector (Smith et al., 2001:938). This aggregate effect hides substantial regional differences, with benefits mostly predicted in the developed world and strongly negative impacts for populations poorly connected to regional and global trading
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
systems.
Other sectors
A number of other sectors will be affected by climate change, including the livestockLivestock
Livestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...
, forestry
Forestry
Forestry is the interdisciplinary profession embracing the science, art, and craft of creating, managing, using, and conserving forests and associated resources in a sustainable manner to meet desired goals, needs, and values for human benefit. Forestry is practiced in plantations and natural stands...
, and fisheries
Fishery
Generally, a fishery is an entity engaged in raising or harvesting fish which is determined by some authority to be a fishery. According to the FAO, a fishery is typically defined in terms of the "people involved, species or type of fish, area of water or seabed, method of fishing, class of boats,...
industries. Other sectors sensitive to climate change include the energy
Energy industry
The energy industry is the totality of all of the industries involved in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution...
, construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, tourism
Tourism
Tourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
and recreation
Recreation
Recreation is an activity of leisure, leisure being discretionary time. The "need to do something for recreation" is an essential element of human biology and psychology. Recreational activities are often done for enjoyment, amusement, or pleasure and are considered to be "fun"...
industries. The aggregate impact of climate change on most of these sectors is highly uncertain (Schneider et al., 2007:790).
Regions
- Africa: In Africa, coastal facilities are economically significant. In a literature assessment, Desanker et al. (2001:490) concluded that climate change would result in sea-level rise, coastal erosionCoastal erosionCoastal erosion is the wearing away of land and the removal of beach or dune sediments by wave action, tidal currents, wave currents, or drainage...
, saltwater intrusionSaltwater intrusionSaltwater intrusion is the movement of saline water into freshwater aquifers. Most often, it is caused by ground-water pumping from coastal wells, or from construction of navigation channels or oil field canals. The channels and canals provide conduits for salt water to be brought into fresh...
, and flooding. Desanker et al. (2001) predicted that these changes would have a significant impact on African communities and economies. - Coasts and low-lying areas: In literature assessment, Nicholls et al. (2007:338-339) concluded that the socio-economic impacts of climate change on coastal and low-lying areas would be overwhelmingly adverse. Some benefits, however, were noted, e.g., the opening of new ocean routes due to reduced sea ice. Compared with developed countries, the protection costs associated with projected sea level rise were found to be relatively higher for developing countries.
- Polar regions: Anisimov et al. (2001:804) reviewed the literature on climate change impacts in polar regions. With very high confidence, they concluded that the impact of climate change on infrastructure would increase economic costs. New opportunities for trading and shipping across the Arctic oceanArctic OceanThe Arctic Ocean, located in the Northern Hemisphere and mostly in the Arctic north polar region, is the smallest and shallowest of the world's five major oceanic divisions...
, lower operational costs for the oil and gas industry, lower heating costs, and easier access for ship-based tourism, were expected to bring economic benefits. - Small islands: In a literature assessment, Mimura et al. (2007:689) concluded, with high confidence, that on small islands, tourism would, for the most part, be negatively affected by climate change. On many small islands, tourism is a major contributor to GDP and employment.
Other systems and sectors
- Freshwater resources: In this sector, costs and benefits of climate change may take several forms, including monetary costs and benefits, and ecosystem and human impacts, e.g., loss of aquatic species and household flooding. In a literature assessment, Kundzewicz et al. (2007:191) found that few of these costs had been estimated in monetary terms. In respect to the water supply, they predicted that costs would very likely exceed benefits. Predicted costs included the potential need for infrastructureInfrastructureInfrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
investments to protect against floods and droughts. - Industry, settlements and society:
- In a literature assessment, Wilbanks et al. (2007:377) concluded, with high confidence, that the economic costs of extreme weather events, at large national or large regional scale, would be unlikely to exceed more than a few percent of the total economy in the year of the event, except for possible abrupt changesAbrupt climate changeAn abrupt climate change occurs when the climate system is forced to transition to a new state at a rate that is determined by the climate system itself, and which is more rapid than the rate of change of the external forcing...
. In smaller locations, particularly developing countries, it was estimated with high confidence that, in the year of the extreme event, short-run damages could amount to more than 25% GDP. - Infrastructure: According to Tol (2008), roads, airport runways, railway lines and pipelines, (including oil pipelines, sewerSanitary sewerA sanitary sewer is a separate underground carriage system specifically for transporting sewage from houses and commercial buildings to treatment or disposal. Sanitary sewers serving industrial areas also carry industrial wastewater...
s, water mains etc.) may require increased maintenance and renewal as they become subject to greater temperature variation and are exposed to weather that they were not designed for.
- In a literature assessment, Wilbanks et al. (2007:377) concluded, with high confidence, that the economic costs of extreme weather events, at large national or large regional scale, would be unlikely to exceed more than a few percent of the total economy in the year of the event, except for possible abrupt changes
Aggregate impacts
Aggregating impacts adds up the total impact of climate change across sectors and/or regions (IPCC, 2007a:76). In producing aggregate impacts, there are a number of difficulties, such as predicting the ability of societies to adapt climate change, and estimating how future economic and social development will progress (Smith et al., 2001:941). It is also necessary for the researcher to make subjective value judgements over the importance of impacts occurring in different economic sectors, in different regions, and at different times.Smith et al. (2001) assessed the literature on the aggregate impacts of climate change. With medium confidence, they concluded that a small increase in global average temperature (up to 2 °C, measured against 1990 levels) would result in an aggregate market sector impact of plus or minus a few percent of world GDP. Smith et al. (2001) found that for a small to medium (2-3 °C) global average temperature increase, some studies predicted small net positive market impacts. Most studies they assessed predicted net damages beyond a medium temperature increase, with further damages for greater (more than 3 °C) temperature rises.
With low confidence, Smith et al. (2001) concluded that the non-market impacts of climate change would be negative. Smith et al. (2001:942) decided that studies might have understated the true costs of climate change, e.g., by not correctly estimating the impact of extreme weather
Extreme weather
Extreme weather includes weather phenomena that are at the extremes of the historical distribution, especially severe or unseasonal weather. The most commonly used definition of extreme weather is based on an event's climatological distribution. Extreme weather occurs only 5% or less of the time...
events. It was thought possible that some of the positive impacts of climate change had been overlooked, and that adaptive capacity had possibly been underestimated.
Some of the studies assessed by Schneider et al. (2007:790) predicted that gross world product
Gross world product
Gross world product is the total gross national product of all the countries in the world. This also equals the total gross domestic product. See measures of national income and output for more details...
could increase for 1-3 °C warming (relative to temperatures over the 1990-2000 period), largely because of aggregate benefits in the agricultural sector. In the view of Schneider et al. (2007), these estimates carried low confidence. Stern (2007) assessed climate change impacts using the basic economics of risk premium
Risk premium
A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset...
s (Yohe et al., 2007:821). He found that unmitigated climate change could result in a reduction in welfare
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
equivalent to a persistent average fall in global per-capita consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
of at least 5%. The study by Stern (2007) has received both criticism and support from other economists (see Stern Review
Stern Review
The Stern Review on the Economics of Climate Change is a 700-page report released for the British government on 30 October 2006 by economist Nicholas Stern, chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and also chair of the Centre...
for more information). IPCC (2007a) concluded that "Aggregate estimates of costs mask significant differences in impacts across sectors, regions and populations and very likely underestimate damage costs because they cannot include many non-quantifiable impacts."
Marginal impacts
The social costSocial cost
Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...
of carbon (SCC) is an aggregate measure of the impacts of climate change. It is defined as the incremental (or marginal
Margin (economics)
In economics, a margin is a set of constraints conceptualised as a border. A marginal change is the change associated with a relaxation or tightening of constraints — either change of the constraints, or a change in response to this change of the constraints.- Extensive and intensive margins...
) social cost of emitting one more tonne of carbon (as carbon dioxide) into the atmosphere at any point in time (Yohe et al., 2007:821). Different GHGs have different social costs. For example, due to their greater physical capacity to trap infrared radiation, HFCs have a considerably higher social cost per tonne of emission than carbon dioxide. Another physical property that affects the social cost is the atmospheric lifetime of the GHG.
Estimates of the SCC are given in the carbon tax article. These estimates are highly uncertain and cover a wide range (Klein et al., 2007:756). The discrepancies in estimates can be broken down into normative
Normative economics
Normative economics is that part of economics that expresses value judgments about economic fairness or what the economy ought to be like or what goals of public policy ought to be....
and empirical
Empirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....
parameters (Fisher et al., 2007:232). Key normative parameters include the aggregation of impacts across time and regions. The other parameters relate to the empirical validity of SCC estimates. This reflects the poor quality of data on which estimates are based, and the difficulty in predicting how society will react to future climate change. In a literature assessment, Klein et al. (2007:757) placed low confidence in SCC estimates.
Sensitivity analysis
Sensitivity analysisSensitivity analysis
Sensitivity analysis is the study of how the variation in the output of a statistical model can be attributed to different variations in the inputs of the model. Put another way, it is a technique for systematically changing variables in a model to determine the effects of such changes.In any...
allows assumptions to be changed in aggregate analysis to see what effect it has on results (Smith et al., 2001:943):
- Shape of the damage function: This relates impacts to the change in atmospheric greenhouse gasGreenhouse gasA greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...
(GHG) concentrations. There is little information on what the correct shape (e.g., linear or cubic) of this function is. Compared with a linear functionLinear functionIn mathematics, the term linear function can refer to either of two different but related concepts:* a first-degree polynomial function of one variable;* a map between two vector spaces that preserves vector addition and scalar multiplication....
, a cubic functionCubic functionIn mathematics, a cubic function is a function of the formf=ax^3+bx^2+cx+d,\,where a is nonzero; or in other words, a polynomial of degree three. The derivative of a cubic function is a quadratic function...
shows relatively small damages for small increases in temperature, but more sharply increasing damages at greater temperatures. - Rate of climate change: This is believed to be an important determinant of impacts, often because it affects the time available for adaptation.
- Discount rate and time horizon: Models used in aggregate studies suggest that the most severe impacts of climate change will occur in the future. Estimated impacts are therefore sensitive to the time horizonTime horizonA time horizon, also known as a planning horizon, is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. It is necessary in an accounting, finance or risk management regime to assign such a fixed horizon time so that alternatives can be...
(how far a given study projects impacts into the future) and the discount rate (the value assigned to consumption in the future versus consumption today). - Welfare criteria: Aggregate analysis is particularly sensitive to the weighting (i.e., relative importance) of impacts occurring in different regions and at different times. Studies by Fankhauser et al. (1997) and Azar (1999) found that greater concern over the distribution of impacts lead to more severe predictions of aggregate impacts.
- Uncertainty: Usually assessed through sensitivity analysis, but can also be viewed as a hedgingHedge (finance)A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...
problem. EMF (1997) found that deciding on how to hedge depends on society's aversionRisk aversionRisk aversion is a concept in psychology, economics, and finance, based on the behavior of humans while exposed to uncertainty....
to climate change risks, and the potential costs of insuring against these risks.