Download Part II: The Impacts of Climate Chance on Growth and

Part II: The Impacts of Climate Change
on Growth and Development
COSTS OF CLIMATE CHANGE IN
DEVELOPED COUNTRIES
15th April 2008
Kernitzkyi, Langmann, Praschl
1
Overview
Impacts on Wealth and Output
◦ Water
◦ Food – Agriculture
◦ Energy
Extreme Weather Events
◦ Impacts of extreme events
 Hurricane Katrina – Economic Impacts
 European Heat wave – Economic Impacts
◦ Costs of Costal Flooding
Financial Centres
◦ Infrastructure at risk
◦ Trade routes and patterns
◦ Knock-on Consequences
2
Overview
Impacts on Wealth and Output
◦ Water
◦ Food – Agriculture
◦ Energy
Extreme Weather Events
◦ Impacts of extreme events
 Hurricane Katrina – Economic Impacts
 European Heat wave – Economic Impacts
◦ Costs of Costal Flooding
Financial Centres
◦ Infrastructure at risk
◦ Trade routes and patterns
◦ Knock-on Consequences
3
Introduction (1)
Developed countries less vulnerable:
1. Proportion of agriculture in developed
countries
2. Latitudes – critical Thresholds
3. Adaptive capacity / resources
 2 – 3°C
 4 – 5°C  advances in the science
“While the most serious impacts of climate
change will fall on the poorest countries,
the developed world will be far from
immune.”
4
Introduction (2)
Focus on potential cost and
opportunities
 Primarily on wealth and output
 Benefits for some sectors (1 – 2°C)
 Rise in temperature 
disproportionately more damage
 Extreme weather events, large-scale
and abrupt impacts, large-scale
shocks and financial contagion

5
Impacts on wealth and output (1)
Influence output via several paths (water,
food, energy)
 Simple production function with
environmental quality:

Y(t)=F(K,L,E)
Source: Stern Report
6
Water
Availability – patterns of rainfall and
snowmelt - runoff
 Intensity rise in higher latitude regions
 Mediterranean climate will face more
pressure
 Europe: 2°C  fall by 20 – 30%
 Global: 4°C  fall by 40 – 50%
 West Coast of the USA  snowpack
decreases

7
Food - Agriculture
Only a small component in developed
countries
 Highly sensitive
 USA GE-Model shows 70 – 80% of
CC induced GDP change due to
agriculture
 Substantial contribution to economywide change in growth

8
Energy
Reduced heating demand in winter
Increased cooling demand in summer
Lower latitudes  rise in demand
Higher latitudes  demand expected to
decrease slightly
 Impacts on energy production (nuclear
power)




“The distribution of impacts is likely to follow a strong
north-south gradient – with regions such as Canada,
Russia and Scandinavia experiencing some net benefits
from moderate levels of warming, while low latitude
regions will be more vulnerable. At higher temperature,
the risks become severe for all regions of the developed
world”
9
Impacts on wealth and output (2)
„Climate change will have some positive
effects for a few developed countries
for moderate amounts of warming, but
is likely to be very damaging for much
higher temperature increases that
threaten the world in the second half
of this century and beyond if
emissions continue to grow.“
10
Cost of Climate Change (1)
USA case study on the long-run growth
impacts:
 GE-Model – impacts on investment,
capital stock, labour and consumption
 2 scenarios (optimistic and
pessimistic)
 Carbon fertilisation, adaptation and
potential damage
11
Cost of Climate Change (2)
The change was largely driven by changes
in agricultural prices
 Change in energy prices and mortality
 Didn’t fully account for extreme weather
events

12
Key vulnerabilities
Developed countries: the poorest will be the
most vulnerable. Why?
1. Poorer households situated in higher risk
areas
2. Low income groups have fewer financial
resources to cope with climate change (eg.
insurance cover)
3. Residents in deprived areas are likely to be
less aware and worse prepared for extreme
weather events

13
Overview
Impacts on Wealth and Output
◦ Water
◦ Food – Agriculture
◦ Energy
Extreme Weather Events
 Hurricane Katrina – Economic Impacts
 European Heat wave – Economic Impacts
◦ Costs of Costal Flooding
Financial Centres
◦ Infrastructure at risk
◦ Trade routes and patterns
◦ Knock-on Consequences
14
Impacts of extreme events
Costs of extreme weather events will
increase rapidly at higher temperatures
 Weather-related losses have increased
by 2 % each year since the 1970s
 Could reach 0,5 – 1 % of world GDP by
the middle of the century
(lower bound – higher bound)
 Annual losses already $ 60 billion since
the 1990s (0,2 % of world GDP)

15
Hurricane Katrina - Economic Impacts




More than 1,300 people died
The costliest weather catastrophe on
record
$ 125 billion in economic losses/1,2 % of
U.S. GDP
For a large part driven by the
exceptionally warm waters of the gulf
(1 – 3 °C above long term average)
Source: Munich Re (2006)
16
Hurricane Katrina - Economic Impacts
•
Thousands of jobs lost:
- New Orleans: 190,000
- Louisiana: 214,000 or 12 percent of the state's
total jobs
• Energy crunch because of U.S. oil and gas industry
damage
Source: Herman, Charles (2006)
17
Hurricane Katrina – Economic Impacts
•
•
600,000 people still not returned to the area
10 month after Katrina, U.S. oil production levels still
30 % less than Pre Katrina levels
• Most significant legacy of Hurricane Katrina are the
volatile energy markets
Source: Herman, Charles (2006)
18
European Heat wave – Economic impacts
•
•
•
•
2,3°C hotter than long term average
35,000 deaths
Farming, livestock and forestry suffered severe
damages
By the middle of the century commonplace
Source: Munich, Re (2004)
19
Hot summer
Cool summer
Source: Met Office, Hadley Center 2004
20
European Heat wave – Economic impacts
Economical impact of damages: €14 billion
• Forest fires: eg. Portugal: 215,000 ha.
• Effects on: tourism, transport, energy production
• Long-term agricultural damages and higher food
prices in the year after
•
Sources: Meterological Office, GB/Stern (2007)
21
Cost of costal flooding in developed
country regions
1-m of sea level rise is plausible by the end
of the century under rapid rates of warming
 North America: area just under the size of
Alaska (640,000 km²) would be lost
 Europe: 20 million people would be
affected, Netherlands most vulnerable
 Costs mainly consist of:
protection costs, dry- and wetland losses
and costs of displaced people (migration)

22
Projected costs of coastal flooding
(period of 2080 – 2089/2 scenarios)
Source: Anthoff et al. (2006) analysing data from Nicholis and Tol (2006)
23
Overview
Impacts on Wealth and Output
◦ Water
◦ Food – Agriculture
◦ Energy
Extreme Weather Events
◦ Key vulnerabilities
◦ Impacts of extreme events
 Hurricane Katrina – Economic Impacts
 European Heat wave – Economic Impacts
◦ Costs of Costal Flooding
Financial Centres
◦ Infrastructure at risk
◦ Trade routes and patterns
◦ Knock-on Consequences
24
Financial Centers

Physical risks
◦
◦
◦
◦
◦

London, New York, Tokyo in the floodplain
Import / Export activities
Sea-borne trade
Costal manufacturing
Refining activities
Correlated risks
◦ Simultaneous
impacts on a
range of different
sectors
„Hong Kong financial district by night“
http://www.geog.ox.ac.uk/research/transformations/projects/fina
nce0.png
25
Capital Constraints

Constraints on insurance
◦ More capital for extreme events

Spillover risks
Source: Stern Review, Chapter 5, Page 15
◦ Restrictions in insurance cover
26
Capital Contraints (2)

Summary Extreme Events
Source: Stern Review, Chapter 5, Page 18
27
Trade Routes and Patterns

Polar region
◦ New routes

Gulf stream
◦ Keeps Murmansk open all the year

Everywhere
◦ Stormier seas
http://www.altiusminerals.com/i/icebreaker.jpg
http://content.edgaronline.com/edgar_conv_img/2007/08/07/0001047469-07006117_G11608.JPG
28
Regional impacts (1) - USA
Short-term benefits in the north
 Extensive damage possible in the south
 Most costly: costal flooding, droughts, stronger
hurricanes
 Shorter Winters and reduced snowfall
 Agriculture

Rebalancing of the economy
 Northward shift in economic activity and population
 Arctic regions will not follow this trend

29
Knock-on Consequences

Developing Countries on Developed
Countries
◦ Disruption to global trade and security
◦ Population movement
◦ Financial instabilities

„climate-induced conflicts“
30
Excursus: Haiti
Deadly protests
about rising
food prices
 Dismissed
Prime Minister
on Saturday
 Why?

◦
◦
◦
◦
◦
Droughts
Flooding
bio fuel
oil price
weak dollar
U.N. peacekeepers patrol in an armoured vehicle during
protests on a street in Port-au-Prince, Haiti.
www.time.com, How Hunger Could Topple Regimes
Fr. 11th April 2008
Food prices
31
Conclusion (1)

Stern:
◦ „The costs of climate change for developed countries could
reach several percent of GDP as higher temperatures lead to a
sharp increase in extreme weather events and large-scale
impacts“ (Stern Review, Ch. 5, Page 17)
◦ “The costs of extreme weather events alone could reach 0.5 1% of world GDP …” (Stern Revie, Ch. 5 Page 1)

IPCC:
◦ “Impacts of climate change will vary regionally but, aggregated
and discounted to the present, they are very likely to impose net
annual costs which will increase over time as global
temperatures increase.” (4th AR, Summary for Policymakers, WG II, Page 17)
◦ These observations confirm evidence reported in the Third
Assessment that, while developing countries are expected to
experience larger percentage losses, globalmean losses could
be 1-5%GDP for 4°C of warming. (4th AR, Summary for Policymakers, WG II,
Page 17)
32
Conclusion (2)
Small increase 2 – 3°C could benefit some
 Above 3°C – overall negative effects
 4 – 5°C few research


Extreme events?, Lags?, Thresholds?,
“climate-induced conflicts”?
“developed countries are far from immune”
 CC “will fall on the poorest countries”

33
End
Thank you for your attention (patience)!
34
Questions

Q1
What additional factor should be included in
a “new enhanced” production function and
give a short explanation of this factor?
35
Questions

Q2
Why does Stern focus primarily on
developed countries in his analysis?
36
Questions

Q3
Which continent or region do you think
suffers most ECONOMICALLY from
climate change and WHY?
37
Questions

Q4
Which economic effects can you
imagine for Austria? Try to differentiate
between the three main sectors
production, industry and services.
38
Questions

Q5
How can abrupt shifts in climate and
rising costs of extreme weather events
affect global financial markets?
39
Questions

Q6
Suppose that no insurance is willing to
offer a contract for your house, firm,
etc. What would be your reaction?
40
Questions

Q7
Stern remarks that impacts on
developing countries will have
knock-on effects on developed
countries. What are those effects? Do
you think they will be a serious
problem?
41
Questions

Q8
Think about knock-on effects again.
Are there any possible mitigation
strategies that developed countries
could apply?
42