the impact of climatic shocks on alberta’s economy: a vector autoregression analysis by wes lu...
TRANSCRIPT
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The Impact of Climatic Shocks on Alberta’s Economy: A Vector Autoregression Analysis
byWes Lu
Supervisors: Vic Adamowicz and Sandeep Mohapatra
Department of Resource Economics and Environmental SociologyUniversity of Alberta
Climate Change: How Do We Know ?
(Credit: Vostok ice core data/J.R. Petit et al.; NOAA Mauna Loa CO2 record.)
Other Evidence of Climate Change
◦ Changed precipitation pattern◦ Rise in global sea levels◦ Retreating glaciers ◦ Extreme weather events (e.g., floods, droughts and storms)
The Economic Impact of Climate Change◦ Nordhaus (2008) found that the present value of climatic change
damage may be $22.6 trillion (in 2005 U.S. dollars)
◦ It is estimated that if no specific actions are taken, the overall cost due to climate change will be at least 5% of global GDP each year (Stern et al. 2006).
◦ Moreover the impacts of climate change are not homogeneous across regions and hence region specific studies are required to inform policymakers.
◦ Adapting to climate change is essential to mitigate the negative impacts and maintain prosperity for our society
Why This is Important In Canada? ◦ Climate change is considered to be more intense for northern regions
including Alberta, Canada.
◦ Most Canadian studies are dated and only a few of them are economy-wide and have analyzed the impacts of climate change at the regional level.
◦ Among the large Canadian literature on national and regional economic growth and its drivers, not a single study considers climate change as an explanatory factor
◦ This is the first Canadian study using a time series model to investigate the dynamic relationship between climate change and economic growth
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Main Research Objective
To analyze the quarterly response of Alberta’s agricultural, non-agricultural, and total GDP growth to temperature and precipitation shocks, as well as oil price shock.
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Data and Methods I specify a VARX model as follows:
• Yt: Growth rates of total GDP/agr. GDP/non-agr. GDP, fixed capital formation, trade openness, and unemployment rate (the Conference Board of Canada), and net migration (the Conference Board of Canada and Statistics Canada)
• Xt: Growth rates of Oil price (US Energy Information Administration), world GDP (World Development Indicators), total precipitation and max temperature (Faramarzi et al. (2015)
• All are quarterly data at the provincial level, from 1986 Q1 to 2007 Q4
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Results
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Results (Oil Price Shock)Total GDP Growth Agr. GDP Growth
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Results (Climatic Shocks)
Total GDP Growth:
Agr. GDP Growth:
(3)
(2)
(4)
(1)
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Cumulative Effect for GDP GrowthCumulative effect: a summation of mean responses of each period for a period of four years (16 quarters) starting from the climatic shocks
Temperature shocks: o Agr. GDP growth: -0.49o Total GDP growth: -0.07
Precipitation shocks: o Agr. GDP growth: +0.09o Total GDP growth: +0.004
Both climatic shocks tend to induce stronger effects on agricultural GDP growth than on total GDP growth
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In Sample Forecast Scenario 1:
◦ a 30% increase in temperatures for each quarter within the forecast period.
Scenario 2: ◦ a 30% increase in precipitation.
Scenario 3: ◦ both temperatures and precipitation go up by 30%.
Scenario 4: ◦ a 30% increase in temperatures and a 30% decrease in precipitation.
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Average Economic Impact on GDP growth
Scenario 1: a 30% increase in temperatures for each quarter within the forecast period.
Scenario 2: a 30% increase in precipitation.
Scenario 3: both temperatures and precipitation go up by 30%.
Scenario 4: a 30% increase in temperatures and a 30% decrease in precipitation.
Total GDP Growth:
S-1: 0.6% S-2: 0.2% S-3: 0.4% S-4: 0.9%
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Average Economic Impact on GDP growth
Scenario 1: a 30% increase in temperatures for each quarter within the forecast period.
Scenario 2: a 30% increase in precipitation.
Scenario 3: both temperatures and precipitation go up by 30%.
Scenario 4: a 30% increase in temperatures and a 30% decrease in precipitation.
Total GDP Growth:
S-1: 0.6% S-2: 0.2% S-3: 0.4% S-4: 0.9%
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Concluding Remarks1. Temperature shocks tend to have significant and negative impacts
on GDP growth rate
2. Precipitation shocks tend to result in overall positive impacts on GDP growth but are not significant
3. Increased precipitation tends to partially alleviate negative impacts on economic growth due to increased extreme high temperatures, while decreased precipitation tends to exacerbate on such negative effects
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Concluding Remarks4. In theory, the VARX model incorporates adaptation. However, the
results still suggest significant and negative climate impacts of temperature shocks on GDP growth. This indicates the potential climate impacts may go beyond our historical adaptation.
Autonomous adaptation or Planned adaptation?
5. It is important for Albertans to be prepared to mitigate the negative impacts.
6. Environment or Oil production?!
