What Are the Economic Consequences of Climate Change?

The pressing importance of figuring out how rising temperatures will affect people and places around the world
A beach club destroyed by Hurricane Sandy (Reuters)

When Hurricane Sandy pummeled the east coast of the U.S. and the Caribbean in October 2012 it exposed millions of people and billions of dollars worth of economic assets to the sorts of hazards that might be expected to increase as a result of climate change. An estimated 1.8 million structures and homes were destroyed or damaged, with economic losses exceeding $65 billion.

Among the businesses most negatively affected by Sandy were tourism (losses of more than $1 billion and 10,000 jobs) and small- and medium-scale manufacturing and storage. Retailers, such as clothing firm Eileen Fisher, lost inventory when Sandy flooded warehouses and disrupted supply chains. 

There were a few bright spots: Building-supply stores like Home Depot saw sales shoot up in locations affected by the storm. In the three months after the storm, the company attributed $242 million in sales to the event as residents and businesses pieced back together their former homes and livelihoods.

But sales of material and lumber aside, Sandy's bill was huge. Likewise Katrina, following which $40 billion in claims were filed, an amount equivalent to almost half of worldwide catastrophic claims made in 2005. And we know from Katrina that it can take years to recover: According to the U.S. Census, eight years later New Orlean's population was only 72 percent of its pre-storm level.

Events like these show how climate change, which will result in more severe storms, will have a huge and varied global economic impact, and that the impacts will hit locally and ripple out by affecting supply chains, consumer behaviors, regional economies, and downstream jobs.

Yet the scientists who met in Japan recently to finalize the much-anticipated Intergovernmental Panel on Climate Change (IPCC) report on climate impacts and vulnerabilities called such economic estimates as “difficult” to make. The closest they came to an overall number was to say that aggregate losses across the world economy have a more than 50 percent chance of being greater than 2 percent of global GDP. They also noted that for most economic sectors, the impacts of climate change would be smaller than the impacts of population and technology change.

For most people, what matters are not the global economic impacts, but the effects on the places they live and work. The IPCC report spends a lot of time on how climate will affect agriculture and natural resources. Although, worldwide, as much as one-third of all those employed work in agriculture, this share is decreasing and the agricultural sector contributes about three percent to the overall value of the global economy.  The report says relatively little about the impacts on sectors that now drive economic development and are the major sources of employment: the chemical, textile, electronics, and automobile industries; retail, health services, and real estate.

This is a problem, not only for the relevance of IPCC, but for the research community in general. We look to assessments such as the IPCC's to translate the science for government leaders, and more importantly to increase public awareness of the potential consequences of climate change, not just in the abstract but how it will affect their own jobs and wallets. These reports have far-reaching repercussions. If the panel has little to say or is uncertain about how climate change will impact the important parts of our economies, then everyone is less likely to take the reports seriously.

So why did the panel have so little to say about the economic consequences of climate change?

First, because there is actually very little published, peer-reviewed science on the risks that climate poses to the economy. What data we do have comes from company reports and studies by consultants that do not go through scientific peer review. The last time the panel relied on studies that were less than ironclad, they got burned by the media.

You might remember the field day climate-change deniers had in 2007 when the report cited documents about rapidly melting Himalayan glaciers and forecasts of steep declines in African crop yields though they had not been peer reviewed for scientific accuracy. Some IPCC scientists, including our colleagues Malcolm Hughes and Mike Mann, were sued to obtain access to emails relating to the report. This time around, the scientists were understandably nervous about citing anything not peer-reviewed, especially reports from industry or environmental groups.

That put the panel in a bind. This is not surprising given that the distribution of funding for climate change research is lopsided, favoring physical science rather than social science. The National Science Foundation's Social and Behavioral Science program is the primary source of federally funded basic research in the social sciences, and its whole budget for all social science—not just climate—is one-tenth of the U.S. Global Change Program, which was $2.6 billion in 2013. What this means is that while we have a robust NASA satellite program, we have very little basic social-science research being done on the how climate change will impact the economy.

Presented by

Diana Liverman is the director of the Institute of the Environment at the University of Arizona.

Amy Glasmeier is a professor of economic geography and regional planning at MIT.

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