about 3 years ago • 6 mins
As the planet warms, plenty of countries will take an economic hit, according to a new study from Oxford Economics. But – perhaps more surprisingly – some of the world’s richest nations could actually benefit from climate change.
We brought in the report’s author, James Nixon, to discuss his findings in more depth. While many economists will perform a bottom-up analysis of the impact of climate change on economies, James and his team took a big-picture, top down approach and simply looked at the long-term correlations between temperature and economic growth. After crunching many data points from different points in time and locations across the world, they found that 15 degrees Celcius is the sweet spot for the economy. If you move colder than that or warmer than that then growth takes a hit. And that has some fascinating implications, as we’ll see…
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Andrew Rummer: Welcome James. To kick off, could you run us through the main findings of this study?
James Nixon: We get this basically hump-shaped curve for temperatures. And the suggestion is that the world almost divides into two halves. One half we see, let's call them relatively cool countries, typically in the Northern Hemisphere – so you can think of obvious places like Canada and Russia – and those are countries where the modest amounts of warming that we've seen over the last 50 or 60 years, those modest amounts of warming are actually correlated with improvements in economic activity. So that seems to indicate that, at least in those cooler northern hemisphere countries, modest amounts of further warming over the next 30 years may well be associated with improvements in the economic outlook.
Now, one of the problems with this technique is that it's very much a black box in the sense that we can't disaggregate that and say why. It's just a correlation that comes out of the numbers. But the sort of intuition would be that you can imagine a country like Russia or Canada, as we see a modest increase in warming, their growing season extends, perhaps they have less frost. And so we could simply be picking up an increasing agricultural productivity. In other European countries if we have less days when the ground is frozen then that may correlate with increases in things like construction activity – because you can't build buildings when it's below freezing because concrete doesn't set and those kinds of things. So, at least for those cooler, Northern Hemisphere countries, what we're suggesting is that, as a sample scenario, let's say we see one degree of further warming between basically now and 2050, those countries could see their economies expand by as much as an extra, say, 10% over the next 30 years compared to just if temperatures basically stayed the same. Now, that may in itself be a relatively conscientious conclusion. And I think you have to say that one of the challenges with this sort of analysis is it's not obvious that the kind of historical trends that we're able to show in the past, necessarily project to the future. And there can easily be all sorts of impacts of climate change that we simply haven't seen yet. And we can't yet measure that. So that's a caveat to that kind of analysis. But in some ways the more significant conclusion – and perhaps what's more interesting – is that we can put numbers on the cost of global warming, particularly for countries that are already warm. And some of those costs can be quite significant. So you look at countries, basically through vast swathes of the globe, in fairly obvious areas, through Latin America, Africa, through into Asian countries, particularly like India, these are countries that are already relatively warm in terms of their annual climate. And what we see is that the further warming that we're projecting between now and 2050 will actually be material and will do significant amounts of economic damage to those economies – potentially reducing their levels of economic activity by as much as 10% or 15% between now and 2050.
Andrew: So does the fact that so many wealthy Northern Hemisphere aren’t likely to see huge economic damage from climate change potentially undermine the political will to take action?
James: The short answer is potentially yes. Rich countries in the Northern Hemisphere, they can basically spend money on adaption. So everyone goes out and starts buying air conditioning units and these kinds of things. And I think it's important to highlight that those forms of expenditure, at least in the short run, would actually be quite beneficial to the economy. You know, if you're a builder of, say, seawalls in the Netherlands, business could be quite good. Between now and 2050 it's very likely that we're going to have this kind of contrast in incentives between countries that, at the very least, may not be particularly affected from climate change. And then you will have other countries that are – already – increasingly at the sharp end. And the challenges with that kind of metric, or that kind of dynamic is that when you look at, again, the work that the IPCC is sort of suggesting in terms of what we have to do mitigation, and the whole kind of thrust of the sort of the Paris Agreement is that to really stop global warming, and indeed limit temperatures to, let's say, two degrees of warming this century, you know, we have to take action. Now, it means to be, you know, day one, week one, we need to basically halve carbon emissions between now and 2030. And so, you have this sort of tension between the messages that are coming out of the scientific literature about how quickly we have to act. And there may well be the case of economic incentives for large parts of the world are simply not aligned, and may not be aligned until the other side of 2050.
Andrew: So, following on from what you’re saying, tackling climate change is often portrayed as a trade off between slowing global warming and slowing economic growth. But it sounds like perhaps that’s not the case and perhaps action to tackle climate change could actually boost the economy.
James: Absolutely. There's a lot of evidence that taking action to address climate change, introducing a green recovery, and undertaking a rapid and complete decarbonization of the economy may actually be both beneficial for the economy and in that it avoids some of these climate costs. And the message is, absolutely, that taking action on climate change may well be a net benefit for the world – probably is a net benefit for the globe – but may actually be positive purely from the point of view of the narrow metric of GDP.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.