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.

Still, we are not without data or analytical resources. The best climate cost estimates we have come from the private sector: industry-funded research centers like the American Petroleum Institute. Businesses and industry have both the most at stake and the most to gain from knowing precisely what will happen, given that their assets are exposed to unanticipated climate events. They need to forecast losses and put recovery plans in place. 

For example, a report from the Carbon Disclosure Project reported on a survey of more than 2,000 companies and found that 44 percent of them had suffered a disruption in production from rainfall or drought and 31 percent had experienced higher production costs. A new report from the Partnership for Resilience and Environmental Preparedness provides detailed guidelines on how companies might assess the resilience of their supply chains to climate disruptions, and gives examples of how Levi Strauss and Starbucks have managed climate risks by helping their suppliers reduce water use in cotton or adapt coffee production to warmer temperatures.

Some of the most detailed data comes from global insurers. A case in point, the Thai floods of 2011 inundated the automobile and electronics manufacturing facilities that had been built on former rice paddies in the floodplain of the Chao Praya River, near Bangkok, and caused losses estimated at more than $45 billion, reducing Thai economic growth and seriously affecting the profits of companies such as Sony and Honda. Toyota reported losses of almost one quarter million automobiles and suspended production lines across Southeast Asia and North America. Because of the concentration of computer hard-disk manufacturing in the flooded industrial parks, prices of desk and laptop hard drives doubled worldwide. There were several studies comparing the flood's impacts on different sectors and companies.

The reinsurer Swiss Re advertises a proprietary web tool which maps environmental vulnerability to earthquakes, floods and climate events on its home page. Users can tailor their investigation down to their countries cities, infrastructure, and economic assets.

Even though corporations frequently withhold specific data on operations, strategy, and performance for reasons of competitive advantage, there are many businesses interested enough in climate risks to provide information to researchers and analysts skilled enough to undertake studies. More importantly, businesses belong to associations, which regularly conduct impact reviews of such topics as trade, regulatory change, and workforce development. By aggregating research findings across firms in an industry, this type of information is used to conduct strategic assessments of likely consequences of threats and opportunities.

Scholars and business analysts regularly retrieve data from firms, process it to obscure sensitive information and then publish the results in peer-reviewed journals. These authors have an enormous incentive to be accurate, and their work should serve as a baseline from which more scientific estimates of economic impact can be made. It should become common practice for scientists to convert and expand such studies into robust peer-reviewed analysis that can be used by climate assessments.

The research community needs to be much better prepared for future assessments, publishing high-quality studies on climate and the economy well in advance of deadlines for IPCC and other reports. But this means that there needs to be collaboration with the private sector to collect good data, and that research funding needs to be balanced. In the U.S. we have spent several decades and billions of dollars observing and modeling the earth and analyzing climate risks to water and ecology, compared to a few million a year for socioeconomic impact studies.

The economic impacts won't necessarily always be negative or large—that's why we need research to examine which sectors, firms, workers and regions will benefit or lose from what type of climate changes. The science community has been ignoring this research at their peril—and at the planet's peril: money talks. Science needs to talk to the money.