by Solomon M. Hsiang Friday, January 20, 2012
Reconsidering the economic implications of climate change
How much will it cost to implement plans to mitigate climate change? And if we don’t implement changes, what will the cost of climate change be?
Economists tend to examine questions like these with cost-benefit analyses. For example, in the climate change debate, if a climate change policy will produce more gains to society than it will cost to implement, a cost-benefit analysis might suggest we should embrace the policy. To date, virtually all cost-benefit analyses of greenhouse gas reductions have suggested that mitigation policies cost more than the benefits they produce, at least in the short run. But most of these analyses have probably dramatically underestimated the economic impacts of a warming climate by not factoring in an important process: what happens to humans when temperatures rise.
This revelation started to come about a couple of years ago, when other researchers and I began shifting the way we consider the social costs associated with climate change. Rather than trying to think of every possible way that climate might affect economies and then adding up all these small numbers to come up with a big estimate, we examined actual historical changes in the atmosphere and then estimated the overall response in an economy by examining historical economic data.
A couple of years ago, Melissa Dell and Benjamin Olken, both at MIT in Cambridge, Mass., and Benjamin Jones at Northwestern University in Evanston, Ill., examined rates of economic growth for all the countries around the world since 1950 and found that in poor countries, when the local temperature rose, the rate of economic growth slowed down, they reported in the National Bureau of Economic Research Working Paper Series. Last year, Jones and Olken added to the finding: They reported in the American Economic Review that exports from poor countries also fell when temperatures rose.
The idea that temperatures can influence economic activity is not new, but the surprising result was how large the economic impact of temperature changes was. Dell and her team found that a 1 degree Celsius increase in annual average temperature was associated with a 1 percent decline in annual growth. This is a large response. In fact, the responses reported in these two studies were so large that many economists have had difficulty believing them. No previous study of climate change had predicted that economies would be this sensitive to temperature. It seems that the earlier studies missed an important mechanism when they were tabulating all the possible impacts of climate change.
To examine this question more carefully, I collected data on temperatures, rainfall, hurricanes and economic output for 28 countries in the Caribbean and Central America from 1970 to 2006, and analyzed how these countries responded to these three environmental variables. In this region, I saw a reduction in economic growth at high temperatures, just as Dell and her colleagues had documented. My analysis, published in Proceedings of the National Academy of Sciences last summer, suggests that the reason economic activity may be so strongly tied to climate may be related to how humans respond to high temperatures.
A large number of laboratory analyses have tried to understand how workers, students or military personnel respond to high-temperature environments. These studies have found that humans perform physical or cognitive tasks best at moderate temperatures of about 22 to 27 degrees Celsius (70 to 80 degrees Fahrenheit). At higher or lower temperatures, people tend to work slower and make more mistakes. So far, none of these results has ever been seriously considered in studies evaluating the impact of global climate changes.
Two conspicuous features of my data strongly suggest that economic slowdowns at high temperatures might be driven by labor responses to high temperatures. First, agriculture, the one industry that is classically thought to be most vulnerable to high temperatures, was not one of the industries that slowed down the most when temperature rose. Instead, labor-intensive industries such as services, retail and communications contracted the most. Second, these industries suffered the most when temperatures became very high. Years with many hot days in the hottest seasons generated the largest losses. This nonlinear response matched the response of laboratory studies surprisingly well, with the strongest economic losses occurring at temperatures higher than 29 degrees Celsius.
Most of us have tried to work in uncomfortably warm temperatures at some point or another — for example, when our air conditioning goes out in August — so perhaps we should not find it surprising that people are less productive when they are in a hotter environment. But just because this mechanism is familiar does not mean it can be neglected from cost-benefit analyses of global climate change.
Most people in the world have low incomes and do not have access to air conditioning. (Perhaps this is why Dell and her team only found strong economic losses in poor countries.) If the global climate warms substantially, many individuals will be exposed to higher temperatures while working and this may have serious implications for the global economy.
Understanding the potential magnitude of this impact is a topic that requires further data and analysis. But if my findings in the Caribbean and Central America are applicable elsewhere, then future economic losses in worker productivity may be comparable or larger than all the previously estimated economic costs of climate change combined.
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