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Part II: The Impacts of Climate Change Part II: The Impacts of Climate Change on Growth and Developmenton Growth and Development

COSTS OF CLIMATE CHANGE IN DEVELOPED COUNTRIES

15th April 2008

Kernitzkyi, Langmann, Praschl

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OverviewOverviewImpacts 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

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OverviewOverviewImpacts 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

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Introduction (1)Introduction (1)Developed countries less vulnerable:1.Proportion of agriculture in developed

countries2.Latitudes – critical Thresholds3.Adaptive capacity / resources2 – 3°C4 – 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.”

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Introduction (2)Introduction (2)Focus on potential cost and

opportunitiesPrimarily on wealth and outputBenefits for some sectors (1 – 2°C)Rise in temperature

disproportionately more damageExtreme weather events, large-scale

and abrupt impacts, large-scale shocks and financial contagion

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Impacts on wealth and output (1)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

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WaterWater

Availability – patterns of rainfall and snowmelt - runoff

Intensity rise in higher latitude regionsMediterranean climate will face more

pressureEurope: 2°C fall by 20 – 30%Global: 4°C fall by 40 – 50%West Coast of the USA snowpack

decreases

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Food - AgricultureFood - Agriculture

Only a small component in developed countries

Highly sensitiveUSA GE-Model shows 70 – 80% of

CC induced GDP change due to agriculture

Substantial contribution to economy-wide change in growth

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EnergyEnergy

Reduced heating demand in winterIncreased cooling demand in summerLower latitudes rise in demandHigher latitudes demand expected to

decrease slightlyImpacts 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”

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Impacts on wealth and output (2)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.“

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Cost of Climate Change (1)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

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Cost of Climate Change (2)Cost of Climate Change (2)

The change was largely driven by changes in agricultural prices

Change in energy prices and mortalityDidn’t fully account for extreme weather

events

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Key Key vulnerabilitiesvulnerabilities

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

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OverviewOverviewImpacts 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

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Impacts of extreme eventsImpacts 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)

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Hurricane Katrina - Economic ImpactsHurricane Katrina - Economic Impacts

More than 1,300 people diedThe costliest weather catastrophe on

record$ 125 billion in economic losses/1,2 % of

U.S. GDPFor a large part driven by the

exceptionally warm waters of the gulf (1 – 3 °C above long term average)

Source: Munich Re (2006)

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Hurricane Katrina - Economic ImpactsHurricane 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)

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• 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

Hurricane Katrina – Economic ImpactsHurricane Katrina – Economic Impacts

Source: Herman, Charles (2006)

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European Heat wave – Economic impactsEuropean 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)

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Hot summer

Cool summer

Source: Met Office, Hadley Center 2004

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European Heat wave – Economic impactsEuropean 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)

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Cost of costal flooding in developed Cost of costal flooding in developed country regionscountry 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)

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Projected costs of coastal flooding Projected costs of coastal flooding (period of 2080 – 2089/2 scenarios)(period of 2080 – 2089/2 scenarios)

Source: Anthoff et al. (2006) analysing data from Nicholis and Tol (2006)

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OverviewOverviewImpacts 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

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Financial CentersPhysical 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/finance0.png

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Constraints on insurance◦More capital for extreme events

Spillover risks◦Restrictions in insurance cover

Capital Constraints

Source: Stern Review, Chapter 5, Page 15

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Capital Contraints (2)

Summary Extreme Events

Source: Stern Review, Chapter 5, Page 18

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Trade Routes and PatternsPolar region◦New routes

Gulf stream◦Keeps Murmansk open all the year

Everywhere◦Stormier seas

http://content.edgar-online.com/edgar_conv_img/2007/08/07/0001047469-07-006117_G11608.JPG

http://www.altiusminerals.com/i/icebreaker.jpg

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Regional impacts (1) - USA

Short-term benefits in the northExtensive damage possible in the southMost costly: costal flooding, droughts, stronger

hurricanesShorter Winters and reduced snowfallAgriculture

Rebalancing of the economyNorthward shift in economic activity and populationArctic regions will not follow this trend

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Knock-on ConsequencesDeveloping Countries on Developed

Countries◦Disruption to global trade and security◦Population movement◦Financial instabilities

„climate-induced conflicts“

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Excursus: HaitiDeadly 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 RegimesFr. 11th April 2008

Food prices

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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)

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Conclusion (2)

Small increase 2 – 3°C could benefit someAbove 3°C – overall negative effects4 – 5°C few research

Extreme events?, Lags?, Thresholds?, “climate-induced conflicts”?

“developed countries are far from immune”CC “will fall on the poorest countries”

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End

Thank you for your attention (patience)!

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Questions Q1

What additional factor should be included in a “new enhanced” production function and give a short explanation of this factor?

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Questions Q2

Why does Stern focus primarily on developed countries in his analysis?

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Questions Q3

Which continent or region do you think suffers most ECONOMICALLY from climate change and WHY?

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Questions Q4

Which economic effects can you imagine for Austria? Try to differentiate between the three main sectors production, industry and services.

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Questions Q5

How can abrupt shifts in climate and rising costs of extreme weather events affect global financial markets?

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Questions Q6

Suppose that no insurance is willing to offer a contract for your house, firm, etc. What would be your reaction?

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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?

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Questions Q8

Think about knock-on effects again. Are there any possible mitigation strategies that developed countries could apply?