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On May 8, flash flooding occurred in a flooded area of Garissa, Kenya, and a truck was submerged in water. Researchers from Harvard University and Northwestern University found that previous estimates of climate change underestimated the macroeconomic damage caused by extreme weather events. Extreme weather conditions not only deplete productivity, but also capital. LUIS TATO/Getty Images
John Rapley is a writer and academic who lives in London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Since economist William Nordhaus established the macroeconomics of climate change with a 1992 study that estimated the long-term economic impacts of climate change, most studies have focused on The consensus was that the global economy would shrink by 1 to 3 times per year. Cent – difficult, but manageable.
However, recent studies are casting doubt on this consensus and are beginning to predict that production will decline even more significantly, in part because the planet is warming faster than previously assumed. Now, a new paper published this week by the U.S. National Bureau of Economic Research may completely shatter this theory.
Climate change will ultimately reduce the value of the global economy by almost a third, according to Adrian Villar of Harvard University and Diego Kanzig of Northwestern University.
Their paper, “Macroeconomic Impacts of Climate Change: Global and Regional Temperatures,” stands out from previous research.
When the macroeconomics of climate change first emerged as a subfield, its practitioners first scientifically estimated expected future warming and then focused solely on the productivity impacts of rising temperatures. There has been a tendency to model the impact on a country-by-country basis.
However, it is becoming clear that extreme weather events are one of the main channels through which climate change impacts the economy. It turns out that the incidence of extreme weather events is more closely correlated with global temperature changes than with national temperature changes, and storms and droughts have no national boundaries. In this study, we build a new model to estimate this effect.
Researchers found that previous estimates of climate change significantly underestimated the macroeconomic damage caused by extreme weather events that not only hit productivity but also depleted capital. Taking this into account, it becomes clear that the world economy will be 31% poorer by the end of this century.
Moreover, they argue that the damage has already begun. They believe that if there had been no global warming since 1960, the world economy would have been 37% larger than it is today. We know that global growth is slowing, especially in the Western world. A recent article in London's Financial Times named Canada among the top “failed states” or former “model” economies that are holding the world economy back. Although there is considerable debate about the causes of this reversal, there is increasing reason to believe that climate change feedback loops are just beginning to wreak havoc on our economy.
The damage will be much worse because we are still in the early stages of this cycle. Trend lines for the number and severity of extreme weather events and zoonotic pandemics have been rising for decades, and we have not repriced assets to account for the future impacts of climate change. Although the authors say they cannot estimate the impacts in their paper, clues as to what is coming may lie in the sharp and sudden inflation we are seeing in insurance policies. Our future may be one in which we have to spend more money on repairing roads and homes, pay higher taxes to cover the costs, and watch the value of our investments fall.
Most importantly for Canadian viewers, their model suggested that differences between countries were not as significant as previous models predicted. All countries could be hit, although warm middle-income countries are expected to suffer a little more. After all, extreme weather does not differentiate between rich and poor countries. Canada doesn't get a pass.
In rich countries, more infrastructure is damaged by extreme weather events, older people are more vulnerable, and social and healthcare costs increase. After a global temperature shock, capital and investment are depleted, productivity declines, and recovery from environmental shocks becomes progressively slower.
Carbon taxes should ideally reflect the social cost of carbon: the economic damage caused by adding carbon to the atmosphere. Canada's carbon tax just increased to $80 per tonne. Previous estimates of the social cost of carbon have ranged from $100 to $200. However, this new study suggests that that amount is much higher than $1,000, and if you don't pay it now, you'll pay it later.
How much do I have to pay later? Professors Bilal and Kanzig calculate that if we continue on our current course, the ultimate economic cost will be equivalent to fighting a domestic war forever. The next time someone suggests that we should only fight climate change if the cost is not too high, you might decide that you are willing to pay any price to avoid living in an eternal Ukraine or Gaza.
