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This article describes the economic impacts of climate change. Given the inherent nature of economic forecasting, which involves significant degrees of uncertainty, estimates of the results of global warming over the 21st century have varied widely. Many analyses, such as that of the Stern Review presented to the British Government, have predicted reductions by several percent of world gross domestic product due to climate related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. Other studies by independent economists looking at the effects of climate change have found more ambiguous results around the range of net-neutral changes when all aspects of the issue are evaluated, though the issue remains intensely debated.
Contents
Distribution of impacts
Climate change impacts can be measured as an economic cost (Smith et al., 2001:936-941). This is particularly well-suited to market impacts, that is impacts that are linked to market transactions and directly affect GDP. Monetary measures of non-market impacts, e.g., impacts on human health and ecosystems, are more difficult to calculate. Other difficulties with impact estimates are listed below:
In a literature assessment, Smith et al. (2001:957-958) concluded, with medium confidence, that:
With high confidence, it was predicted that with a medium (2-3 °C) to high level of warming (greater than 3 °C), negative impacts would be exacerbated, and net positive impacts would start to decline and eventually turn negative.
Non-market impacts
Smith et al. (2001:942) predicted that climate change would likely result in pronounced non-market impacts. Most of impacts were predicted to be negative. The literature assessment by Smith et al. (2001) suggested that climate change would cause substantial negative health impacts in developing countries. Smith et al. (2001) noted that few of the studies they reviewed had adequately accounted for adaptation. In a literature assessment, Confalonieri et al. (2007:415) found that in the studies that had included health impacts, those impacts contributed substantially to the total costs of climate change.
Agriculture
Depending on underlying assumptions, studies of the economic impacts of a doubling in atmospheric carbon dioxide (CO2) from pre-industrial levels conclude that this would have a slightly negative to moderately positive aggregate effect (i.e., total impacts across all regions) on the agricultural sector (Smith et al., 2001:938). This aggregate effect hides substantial regional differences, with benefits mostly predicted in the developed world and strongly negative impacts for populations poorly connected to regional and global trading systems.
Other sectors
A number of other sectors will be affected by climate change, including the livestock, forestry, and fisheries industries. Other sectors sensitive to climate change include the energy, insurance, tourism and recreation industries. The aggregate impact of climate change on most of these sectors is highly uncertain (Schneider et al., 2007:790).
Regions
Other systems and sectors
Aggregate impacts
Aggregating impacts adds up the total impact of climate change across sectors and/or regions (IPCC, 2007a:76). In producing aggregate impacts, there are a number of difficulties, such as predicting the ability of societies to adapt climate change, and estimating how future economic and social development will progress (Smith et al., 2001:941). It is also necessary for the researcher to make subjective value judgements over the importance of impacts occurring in different economic sectors, in different regions, and at different times.
Smith et al. (2001) assessed the literature on the aggregate impacts of climate change. With medium confidence, they concluded that a small increase in global average temperature (up to 2 °C, measured against 1990 levels) would result in an aggregate market sector impact of plus or minus a few percent of world GDP. Smith et al. (2001) found that for a small to medium (2-3 °C) global average temperature increase, some studies predicted small net positive market impacts. Most studies they assessed predicted net damages beyond a medium temperature increase, with further damages for greater (more than 3 °C) temperature rises.
With low confidence, Smith et al. (2001) concluded that the non-market impacts of climate change would be negative. Smith et al. (2001:942) decided that studies might have understated the true costs of climate change, e.g., by not correctly estimating the impact of extreme weather events. It was thought possible that some of the positive impacts of climate change had been overlooked, and that adaptive capacity had possibly been underestimated.
Some of the studies assessed by Schneider et al. (2007:790) predicted that gross world product could increase for 1-3 °C warming (relative to temperatures over the 1990-2000 period), largely because of aggregate benefits in the agricultural sector. In the view of Schneider et al. (2007), these estimates carried low confidence. Stern (2007) assessed climate change impacts using the basic economics of risk premiums (Yohe et al., 2007:821). He found that unmitigated climate change could result in a reduction in welfare equivalent to a persistent average fall in global per-capita consumption of at least 5%. The study by Stern (2007) has received both criticism and support from other economists (see Stern Review for more information). IPCC (2007a) concluded that "Aggregate estimates of costs mask significant differences in impacts across sectors, regions and populations and very likely underestimate damage costs because they cannot include many non-quantifiable impacts."
Richard S Tol has twice revised his figure incorporated as fig 10-1 in IPCC reports from his "The Economic Effects of Climate Change". In the second revision he says "The IPCC discussion of this figure offers some useful cautions about interpretation:" and quotes that as saying:
"Estimates agree on the size of the impact (small relative to economic growth), and 17 of the 20 impact estimates shown in Figure 10-1 are negative. Losses accelerate with greater warming, and estimates diverge. The new estimates have slightly widened the uncertainty about the economic impacts of climate. Welfare impacts have been estimated with different methods, ranging from expert elicitation to econometric studies and simulation models. Different studies include different aspects of the impacts of climate change, but no estimate is complete; most experts speculate that excluded impacts are on balance negative. Estimates across the studies reflect different assumptions about inter-sectoral, inter-regional, and inter-temporal interactions, about adaptation, and about the monetary values of impacts. Aggregate estimates of costs mask significant differences in impacts across sectors, regions, countries, and populations. Relative to their income, economic impacts are higher for poorer people."
Marginal impacts
The social cost of carbon (SCC) is an aggregate measure of the impacts of climate change. It is defined as the incremental (or marginal) social cost of emitting one more tonne of carbon (as carbon dioxide) into the atmosphere at any point in time (Yohe et al., 2007:821). Different GHGs have different social costs. For example, due to their greater physical capacity to trap infrared radiation, HFCs have a considerably higher social cost per tonne of emission than carbon dioxide. Another physical property that affects the social cost is the atmospheric lifetime of the GHG.
Estimates of the SCC are given in the carbon tax article. These estimates are highly uncertain and cover a wide range (Klein et al., 2007:756). The discrepancies in estimates can be broken down into normative and empirical parameters (Fisher et al., 2007:232). Key normative parameters include the aggregation of impacts across time and regions. The other parameters relate to the empirical validity of SCC estimates. This reflects the poor quality of data on which estimates are based, and the difficulty in predicting how society will react to future climate change. In a literature assessment, Klein et al. (2007:757) placed low confidence in SCC estimates.
Sensitivity analysis
Sensitivity analysis allows assumptions to be changed in aggregate analysis to see what effect it has on results (Smith et al., 2001:943):
Advantages and disadvantages
There are a number of benefits of using aggregated assessments to measure climate change impacts (Smith et al., 2001:954). They allow impacts to be directly compared between different regions and times. Impacts can be compared with other environmental problems and also with the costs of avoiding those impacts. A problem of aggregated analyses is that they often reduce different types of impacts into a small number of indicators. It can be argued that some impacts are not well-suited to this, e.g., the monetization of mortality and loss of species diversity. On the other hand, Pearce (2003:364) argued that where there are monetary costs of avoiding impacts, it is not possible to avoid monetary valuation of those impacts.
Incomplete estimates
As stated, economic estimates of climate change impacts are incomplete. Analysts have used integrated assessment models to estimate the economic impacts of climate change. These models do include estimates of some impacts, for instance, the effects of climate change on agriculture. In other areas, models exclude some impacts. An example is the possibility that climate change could lead to migration or conflict.
Relative impacts
The effects of climate change can be compared to other effects on human society and the environment. Future socio-economic development may strongly affect climate change impacts. For example, projections of the number of people at risk of hunger vary significantly according to assumptions over future socio-economic development.
Some ecosystems are likely to be especially affected by climate change (e.g., coral reefs). In the long-term (beyond 2050), climate change may become the major driver for biodiversity loss globally.
The socio-economic impacts of climate change are likely to be greatest in communities that face other stresses. For example, poor communities are vulnerable to extreme weather events, and are likely to be especially affected by climate change. In general, however, other changes (e.g., demographic and technological) are likely to have a greater effect on human society than climate change. On the other hand, major ("non-marginal") impacts could occur with abrupt changes in natural and social systems. Scientific understanding of abrupt changes is limited.
Another consideration is how vulnerability to climate change varies with scale. At local scales, extreme weather events can have a significant impact, especially in vulnerable locations. Another potentially significant impact is the long-term effect of sea-level rise on low-lying coastal areas.
Comments on relative impacts
Bostrom (2009) comments that:
Even the Stern Review on the Economics of Climate Change, a report prepared for the British Government which has been criticized by some as overly pessimistic, estimates that under the assumption of business-as-usual with regard to emissions, global warming will reduce welfare by an amount equivalent to a permanent reduction in per capita consumption of between 5 and 20%. In absolute terms, this would be a huge harm. Yet over the course of the twentieth century, world GDP grew by some 3,700%, and per capita world GDP rose by some 860%. It seems safe to say that (absent a radical overhaul of our best current scientific models of the Earth’s climate system) whatever negative economic effects global warming will have, they will be completely swamped by other factors that will influence economic growth rates in this century.
Other analysts have commented on the risks of climate change damages. The German Advisory Council on Global Change (WBGU, 2007) comments that:
Although [the Stern Review's] figures tend to be at the upper end of the scale compared to other estimates currently circulating, even [its] quantitative estimates fail to include the economic upheavals that would arise as a consequence of climate-induced conflicts or might be triggered by climate-induced migration.
Several analysts have emphasized the importance of "catastrophic" risks due to climate change. WBGU (2007) states that due to climate change, "significant impairment" of the global economy is a "distinct possibility". Weitzman (2012) has commented:
Climate change potentially affects the whole worldwide portfolio of utility by threatening to drive all of planetary welfare to disastrously low levels in the most extreme scenarios. With global climate change, diversification [of risk] is limited because all eggs are inherently in one basket.