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Economic Impact of Weather Shocks & Climate Change

How can countries cope?

On Thursday, April 12, The New School hosted, in conjunction with the Schwartz Center for Economic Policy Analysis (SCEPA), a lecture on the economic impacts of climate change and the opportunities to both adapt to and mitigate it. Economic Impacts of Weather Shocks & Climate Change is a continuation of SCEPA’s Climate Change Project, an ongoing engagement that brings together academics, policymakers, students, and concerned citizens to discuss the effects of and responses to climate change. The event featured lectures from two speakers with years of experience in climate change research: Petia Topalova and Prem Shankar Jha. Dr. Topalova is the Research Department Deputy Division Chief at the IMF and has lectured at Harvard’s Kennedy School of Government; Dr. Jha is an economist, writer, and journalist with extensive academic and policy credentials. The event was organized and hosted by Willi Semmler, the Henry Arnhold Professor of Economics at the New School for Social Research, with support from SCEPA’s Bridget Fisher, Diana Shikaki, and Julia Puaschunder. This article offers an overview of each of their talks in the hopes of extending the conversations begun at the lecture to the wider public.

After a brief introduction by Professor Semmler highlighting the importance of climate change research and its relevance for Economics, Petia Topalova began the event by outlining her studies on the effects of weather shocks on countries with different income levels. Her analysis shows that climate change affects all countries, but that the distribution of these outcomes is uneven. While some areas stand to benefit from warming temperatures, it is likely to be the case that emerging economies and low-income countries stand to be the most adversely affected. This is particularly troubling when one considers that developed economies have contributed the vast majority of greenhouse gas emissions historically.

Dr. Topalova’s research highlights the fact that temperatures are increasing at unprecedented rates. While there have always been temperature fluctuations, warming trends have accelerated considerably over the last century or so, and portend a future much warmer still. She presents two ranges of projected temperature rise: an intermediate scenario where preemptive measures limit the increase to 2°C, and an increase of 4°C, reflecting no attempts at mitigation.

Dr. Topalova’s research also considers the relationship between economic wellbeing and temperatures; warmer temperatures are positively related to economic strength up to a point (about 13-15°C), beyond which there is a negative relationship. This means countries on the cooler side stand to warm into the optimal growth zone, whereas countries that are already warm will likely slide farther down the growth path as they overheat. It happens to be the case that low-income countries (LICs) tend to be warmer than the optimal temperature and much warmer than Advanced Economies (AEs). Temperature increases of 1°C do not have much of a significant effect on most advanced economies, whose median baseline temperatures are at roughly 11°C. On the other hand, increases in temperatures of 1°C spell catastrophe for emerging markets and low-income countries, with current median temperatures of 22°C and 25°C, respectively. In fact, most of the world’s population is in the tropics and south of the globe (mostly south and east Asia and Middle East, all Africa, and Central/eastern South America), which is where the 1°C change has the most negative effects. Even though these countries constitute only 20% of global GDP, the 1°C increase has a devastating impact on their GDP growth potential.

The effects of climate change have a big impact on the GDP of emerging markets and low-income countries: in terms of productivity, since the more pronounced sectors there, such as agriculture, are exposed to weather; in terms of capital, since investment is depressed in these countries and it affects reductions of capital stock in the event of a hot year; and in terms of labor, since it could have adverse health consequences such as rises in infant mortality.

Economist Prem Shankar Jha followed Dr. Topalova’s presentation by highlighting the potential for various alternative energy sources. With widespread utilization, he argues, concentrated solar power (CSP) and use of bio mass energy could drive the switch to sustainable energy production, mitigating greenhouse gas emissions and limiting catastrophic climate change. He argues that wind and solar photovoltaic powers (PV), despite tending to be the buzzworthy alternative energy sources, are not sufficient to meet energy needs. Wind provides only an intermittent and variable supply, and PV relies on use of expensive, rare metals and faces significant storage and transmission constraints. Concentrated solar and biomass represent well-understood technologies that have been viable energy sources for decades, but they have not seen widespread use due to cost concerns and aggressive pricing strategies implemented by the entrenched fossil fuel producers.

Concentrated solar power represents an immediate opportunity for developing economies since it can be implemented most effectively in hot areas and does not require rare metals or costly chemicals. It uses a simple technology and although it requires a lot of land, it can function in deserts, which comprise about two-thirds of the Earth’s land surface area. Concentrated solar power is also important because it can become a constant source of income and can be exported, offering significant potential output to lower income economies. Furthermore, it increases employment and shields the economy from inflation driven by escalating fossil fuel prices.

Dr. Jha proposes that biomass can replace oil and gas in the production of transport fuels and petrochemicals. Such biofuels can work either through fermentation or gasification; Gasification is preferred, however, since fermentation requires certain food crops and tends to conflict with human consumption. The advantage of gasification is that anything can be gasified, even garbage – so not only does it help mitigate carbon emissions, it also directly eliminates waste. Additional benefits, particularly relevant to developing economies include protection from droughts and famines, since they can always use the remaining stocks for gasifying and selling the products. In this sense, biomass might help eradicate famines.

Of course, there are still several hurdles before these technologies are adopted at the levels needed to put a real dent in fossil fuel usage. Prices for solar PV have fallen drastically in recent years, drawing much attention and profit to these businesses. Yet PV faces supply constraints since there are limited rare metals that can be used as inputs into PV. This focus on PV unfortunately detracts from investment in CSP, which may be more sustainable in the long run. Largescale investment in biomass hasn’t taken off for similar profit-driven reasons. According to Jha, most of the renewable energy sources are able to be scaled up, if proper market incentives are provided accompanied by largescale public investments.

There will be much more to be said about these topics in the coming months, years, and decades. Dr. Topalova presented us with a picture of a warming globe, its winners, and its losers; It will be a challenge for policymakers in the years to come to weigh economic growth against environmental sustainability, as well as the interrelated problems of poverty and inequality. Dr. Jha provided a potential road map to sustainable energy production; World leaders must consider the pros and cons of the various alternative energy sources and incentivize focus in the right areas either through taxes, subsidies, regulations, information campaigns, or something else. For more research on the economics of climate change, visit the SCEPA page here.

Michael Flaherty is a PhD student in Economics at the New School for Social Research.

Isabella Rigamonti is an undergraduate student in International Business at John Cabot University.

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Michael Flaherty

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