How much will climate change impact the economy?

How much will climate change impact the economy?
How much will climate change impact the economy?

That’s a trillion dollar question.

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When Category 5 Hurricane Otis ripped through Acapulco, Mexico, in October 2023, the city lay in ruins. Winds ripped off facades of beach houses and storm surge flooded lobbies. The storm killed at least 50 people and damaged 80 percent of the hotels in the once-glitzy resort town. Six months later, a Bloomberg reporter described “a grim picture,” with many buildings abandoned and “swimming pools filled with mud.”

And the residents were still working to win back the tourists.

“If there is no tourism, nothing happens,” Juan Carlos Díaz, a 59-year-old worker, told an AP reporter. “It’s like a little chain, it generates (money) for everyone.”

As the climate warms and weather becomes more extreme, similar events could occur around the world, devastating or at least slowing down economies. Economists agree that climate change will cause severe damage and costs, but how and to what extent it will affect the world’s economic engines is the subject of fierce debate in the academic literature. For example, will an extreme weather event impose one-off costs that governments can quickly recover from, or will it permanently slow down the economy? About three-quarters of climate economists think the latter scenario is likely.

The debate is important because the costs of slowing economic growth add up over time. For a large economy like the US or the world, even a small slowdown in economic growth can add up to tens or even hundreds of trillions of dollars in lost wealth by the end of the century – making climate solutions seem like a real bargain in comparison.

A study from April 2024 in the journal Nature Led by climate economist Maximilian Kotz of the Potsdam Institute, he estimated that the cost of climate damage by 2050 will be six times higher than the cost of reducing carbon dioxide emissions that would be consistent with the global goals of the Paris Climate Agreement over the same period.

And climate economists risk underestimating the potential costs of inaction because they can only consider the costs of extreme weather events and their impacts for which data are available.

“Climate damages are always underestimated,” said climate economist Gernot Wagner of Columbia University in a telephone interview. “Some things we simply cannot quantify. For most of these uncertain climate damages, we have accurately and incorrectly estimated their costs to be zero.”

It is also important to remember that economic metrics such as gross domestic product (GDP) do not take into account important factors such as stress, trauma, and the loss of cultural and natural resources that climate change also costs us. The true cost of climate damage goes far beyond simply estimating the amount of GDP lost.

What impact does climate change have on the economy?

The intensification of extreme weather events associated with climate change could affect the economy in a number of ways.

Perhaps they will cause only one-time resource losses—like flooded cities or burned homes—from which the economy can recover through government spending. Or perhaps higher temperatures will force many countries—including the United States—into suboptimal hot climates, permanently slowing their economic growth.

That’s one possible outcome suggested in this 2015 paper, which concludes that there may be an optimal time for economic activity when the average annual temperature is about 13 degrees Celsius (55 degrees Fahrenheit). One reason for this is that high temperatures can reduce labor productivity. For example, a 2014 paper found that Americans work about an hour less on days when temperatures are above 38 degrees Celsius than on days when the temperature is a more comfortable 27 degrees Celsius.

A growing number of studies suggest that changes lie somewhere between these two possibilities: changes in temperature and precipitation, as well as other climate factors, would have persistent but possibly not permanent effects on economic growth.

There are a number of fundamental questions underlying this. What types of climate and weather changes will affect economies and their growth? Will these damages mainly affect the more vulnerable, hotter and poorer countries, or will richer countries with cooler climates also struggle to adapt to more extreme weather conditions? And will these challenges only be a problem for the outdoor industry, or could climate change also affect the productivity of people who work indoors?

Climate change could affect every aspect of the economy

Many studies that examine whether climate change affects economic growth consider only a single variable—such as temperature—as the 2015 study did. But Kotz’s 2024 study considered five variables related to regional temperature and precipitation changes and concluded that the economy faces major risks. Similarly, other studies have found that hurricanes and river floods, as well as the intensity of the El Niño phenomenon, can also have significant damaging effects on the economy.

And while one might assume that industries that operate primarily in air-conditioned indoor environments are largely protected from climate change, some research suggests that may not be the case. For example, a 2012 study of American auto assembly plants found that “within a week, six or more days of high temperatures of 90°F or an additional day of high winds reduce that week’s production by about 8 percent, and six or more rainy days within a week reduce production by 6 percent compared with no rain.”

The study notes that bad weather can delay deliveries in the supply chain and affect worker mood and productivity. A 2021 study estimated that lost wages in the United States from an increase in days above 90°F could rise to tens of billions of dollars per year within a few decades.

How great and expensive will this climate damage be?

Estimates of the impact of these economic climate impacts vary widely. A working paper from the University of California, Davis, and climate economist Frances Moore of the Council of Economic Advisers suggests that the persistence of climate damage and its impact on economic growth is one of the most important factors.

“It is clear that any negative impacts on growth from higher temperatures, which are exacerbated over long, climate-change-induced timescales, are very large and must be taken into account in any analysis of the benefits of climate policy,” Moore wrote by email.

Another 2021 study concluded that of all the different variables and considerations that go into climate economics modeling, the question of whether climate damage affects economic growth is by far one of the most important. That study estimated that, under our current emissions trajectory, global economic activity will be about 30 percent lower in 2100 if climate change slows economic growth than if it does not.

Yet even in studies that take into account their persistence and their impact on economic growth, estimates of climate damage vary considerably. Some studies have estimated that bad climate scenarios could reduce global GDP by 5 to 15 percent by 2100, and that carbon dioxide pollution causes damage known as the “social cost of carbon”—an estimate of the dollar cost per ton of carbon pollution—of about $100 to $200 per ton. The new work by Kotz’s team, as well as Adrien Bilal and Diego Känzig, who also looked at the 10-year persistence of climate damage, comes up with much higher costs. Their studies estimate that climate damage alone could account for 10 to 20 percent of GDP by 2050, with the social cost of carbon exceeding $1,000 per ton.

But there is some potentially good news: the damage that extreme weather events do to the economy may not last forever.

A 2022 study by Moore and colleagues found that temperature effects on the economy may last slightly longer than 10 years. Kotz’s recent study similarly estimated that the economic impacts of precipitation changes last about four years and temperature effects last about eight to 10 years.

“This means that the impact of climate change on economic growth would begin to fade within a decade once we reach net zero emissions,” Kotz wrote by email.

His team’s study found that if the world meets the Paris goals and limits global warming to less than 2 degrees Celsius, climate damage will stabilize in the second half of the century. Several other studies have concluded that meeting the Paris goals would produce the best outcomes for the global economy.

Bottom line: Many studies have found that preventing future climate change is far less expensive than trying to manage the costly damages associated with it. Yet very few countries are doing enough to reduce their climate pollution in line with the Paris goals. So countries need to implement much more ambitious climate policies to achieve the best economic outcomes, not to mention outcomes that minimize other non-economic losses, suffering and trauma.

This story of Dana Nuccitelli was originally published by Yale Climate Connections and is part of Current reporting on climatea global journalistic collaboration that strengthens climate reporting.

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