Friday, 4 December 2015

Climate change, economic growth and inequality

This week and next, world leaders (and activists) are gathered in Paris to negotiate an agreement to combat climate change. So it seems timely to do a couple of posts on climate change. I'd been holding off on writing about this, and among NZ bloggers Mark Johnson has beaten me to it, but I'm going to do this post anyway.

Last month, the journal Nature published a new article looking at the impacts of temperature change on economic production, by Marshall Burke (Stanford), Solomon Hsiang and Edward Miguel (both UC Berkeley). The paper was covered by media back in October (see The Economist or The Washington Post).

The problem with most studies that attempt to evaluate the impact of temperature on economic output (or growth or productivity) is that they compare warmer countries with cooler countries. But of course there are other differences between countries that are difficult to control for. Burke et al. try an alternative approach - comparing each country in cooler years with the same country in warmer years. In short, they:
analyse whether country-specific deviations from growth trends are non-linearly related to country-specific deviations from temperature and precipitation trends, after accounting for any shocks common to all countries.
The key results are most usefully summarised in the figure below, which shows the change in growth rates for different annual average temperature. The panel on the left shows the overall results, while the panels on the right disaggregate the results between rich and poor countries, early (per 1990) and later periods, and the effects on agricultural and non-agricultural GDP.

Essentially, Burke et al. have demonstrated that temperature has a non-linear effect on economic growth - growth is maximised at an annual average temperature of about 13 degrees Celsius. However, the important results have to do with the implications for rich and poor countries (see panel b in the figure). Most rich countries are in cooler climates (think Europe, or North America for example), while poorer countries are typically in climates that already have average annual temperatures well in excess of the optimum (think Africa or South or Southeast Asia, for example). So, climate change is very likely to have unequal impacts on economic growth between rich and poor countries. It may even make some rich countries initially better off as they approach the optimum temperature (Chris Mooney suggests Canada or Sweden as examples), while simultaneously making most poor countries significantly worse off.

So, unfortunately it seems likely that global (between country) inequality may be exacerbated by the changing climate, because "hot, poor countries will probably suffer the largest reduction in growth". This would undo some of the significant progress that has been made over the last half century in particular.

Importantly, technological change to date hasn't modified the relationship between temperature and growth (see panel c in the figure), which suggests that world leaders need to change the temperature directly, rather than trying to modify the relationship between temperature and growth, if the projected outcome (77% of countries being poorer in per capita terms by 2100) is to be avoided. The authors conclude:
If societies continue to function as they have in the recent past, climate change is expected to reshape the global economy by substantially reducing global economic output and possibly amplifying existing global economic inequalities, relative to a world without climate change.
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