Calculating the cost of ecological disaster

Not so long ago, prevailing work on the macroeconomics of climate change contended that – while set to fiscally devastate low-income countries near the equator – many cooler, wealthier nations will escape the financial fallout and even profit from warmer climes.

By 2017, influential studies had fed into an International Monetary Fund global report showing countries such as Canada and Sweden gaining in per capita outputs if temperatures rise as predicted. However, a Gates Cambridge economist and his team weren’t buying it.

“The idea that rich, temperate nations are economically immune to climate change and could see their prosperity surge as a result… it just seemed so implausible,” says Dr Kamiar Mohaddes [2005], an Associate Professor at Cambridge Judge Business School, Fellow in Economics at King’s College and Gates Cambridge Scholar Trustee.

“It’s not solely about a number on the thermometer. It’s the deviation from climate conditions to which countries are accustomed that determines income loss, whether that’s cold snaps, heat waves, droughts, floods or natural disasters.”

Mohaddes and colleagues crunched the numbers using data from 174 countries going back 60 years to calculate the link between temperature change and income levels.

They modelled the world’s economies under business-as-usual emissions, as well as a scenario in which humanity “gets its act together” and holds to the Paris Agreement.

The study, which found that all countries – rich or poor, hot or cold – will suffer economically under the current emissions trajectory, showed the US losing 10.5% of its GDP, and Canada over 13%, by the end of this century.

Published as a working paper in 2019, the research underpinned much of a 2021 letter to the Chair of the Federal Reserve, signed by 25 members of the United States Congress, calling for the incorporation of climate risk into monetary policy.

This year the research has been updated and expanded in a new working paper using the latest data from the Intergovernmental Panel on Climate Change (IPCC). Results indicate that without significant mitigation and adaptation efforts, global GDP could decline by up to 24% by 2100 if fossil fuel pollution continues unabated.??

Aiming data-driven analyses at those who influence business and policy is at the heart of a new initiative, climaTRACES lab, established this year by Mohaddes and his fellow Cambridge Gates Scholar Dr Ramit Debnath [2018]. Ramit recently conducted research on how lethal heatwaves will hold back India’s economic development.??

ClimaTRACES was launched in May, on the same day that former US vice-president and legendary environmental campaigner Al Gore spoke at King’s College. Gore argued that research at universities focuses on technological solutions to the climate crisis, but there is little research into the “formation of political will” for action.

“Al Gore highlighted the very gap climaTRACES sets out to address,” says Mohaddes. “We want to work out how policy makers and businesses can best understand the cost of climate change and biodiversity loss. We need to take these communities with us through the right communications, and the right policy and product design.”

One of the first research projects from climaTRACES is in collaboration with the Boston Consulting Group (BCG), one of the world’s “big three” management consulting firms.

The new report suggests that an upfront investment of less than 2% of global GDP in additional efforts to prevent global warming will limit the temperature increase to under 2°C, avoiding the loss of an estimated 11% to 13% of cumulative GDP by 2100.

“Our work estimates the cost of inaction in the short-term will be 10% to 15% of lost global GDP by the end of the century – wiping out many trillions of dollars of wealth,” says Mohaddes. “Hesitating to incur the upfront costs of climate mitigation has truly enormous economic implications down the line.”

Working with the private sector will be a focus for climaTRACES. “An organisation like BCG has the machinery to take this research to its client base, to the key players in services, manufacturing and agriculture,” says Mohaddes.

“Our work will be to generate the data and help shape the messages needed to address the climate crisis.”

Read the full article by Fred Lewsey here.