Putting a (New) Price Tag on Global Warming

This year, global leaders and environmental experts will meet for the Conference of the Parties (COP21) in Paris from November 30 to December 11. The goal of COP21, broadly speaking, is to move closer to a legally binding agreement on climate change. This agreement would push nations to create mitigation and adaptation strategies to address the ongoing effects of global warming and thus reduce the future costs of this phenomenon.

Studies show that rising temperatures are associated with decreasing agricultural commodity yields and reduced worker productivity, both in the developed and developing worlds. However, inconsistencies, such as different responses to rising temperatures, appear when comparing the effects of weather on micro-level performance (i.e. commodities and workers) to the effects on total economic output. For instance, wealthy countries show no response to temperature, while poor countries react negatively to every additional degree of warming. A recent study accounts for these discrepancies by aggregating micro- and macro-level data, and suggests that future costs of global warming have been underestimated.

Using data taken from 166 countries over the last 50 years, researchers Marshall Burke, Solomon Hsiang, and Edward Miguel design an innovative experiment to measure the effects of temperature on the economy. Considering that local temperature fluctuations are largely random in the short run, it is possible to think of countries as randomly assigned to “hot” or “cold” years. Researchers treat “warmer” than average years within a country as a treatment effect influencing economic performance, while looking at “cooler” than average years as a control group. To account for prior inconsistencies between micro- and macro-level analyses, the total economic output of each country is calculated as the sum of its micro-level production, which is set as a function of temperature. Researchers are able to isolate the effects of temperature on economic output, while controlling for other factors, such as economic policies, technology, and geography, in addition to all constant differences between countries, which capture the more elusive differences of culture and history.

By examining this information, the researchers find that their data are consistent with what we already know about the effects of temperature on the micro-level building blocks of our economy. Specifically, agriculture and workers show their highest level of performance at moderate temperatures (50-68°F).

Furthermore, since the study sets macro-level achievement as the sum of micro-level performance, the researchers are able to identify a global optimal temperature of 55°F (13°C), where economic output peaks. In other words, if a particular country has an average temperature less than 55°F, any increase, up to 55°F, will improve the economy. Conversely, a country beyond this threshold experiences a decline in economic performance as average temperature increases. This finding agrees with the observation that lower-income countries are usually located in hotter parts of the world, such as sub-Saharan Africa.

Knowing how temperature has affected the economy in the past, and combining this with estimates of future temperatures from Netherlands Royal Meteorological Institute, the authors are able to predict how future scenarios under climate change will translate to economic performance. The paper suggests that economic impacts of unmitigated climate change will be 2.5 to 100 times larger than the predictions of previous models, which incorporate the cost of climate change by estimating the social cost of carbon. Burke et al. estimate a 23 percent decrease in global income by 2100, relative to a world without climate change.

It is important to note that it is relatively impossible to completely eliminate or reverse climate change, but studies like these are meant to draw attention to potential economic effects that may not have been considered. On the bright side, future scenarios present opportunities for groundbreaking policymaking, entrepreneurship, and development of new technologies in order to adapt to this new world. COP21 could represent a turning point where climate change ceases to be seen as a distant reality and begins to be considered as an issue for the newest generation to actively address.

Article Source: Burke, Marshall, Solomon Hsiang, and Edward Miguel. “Global Non-Linear Effect of Temperature on Economic Production,” Nature (2015).

Featured Photo: cc/(Carsten ten Brink)