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Re-evaluating Macroeconomic Impact Of Climate Change


This analytic assessment can draw a parallel in India where extreme weather conditions such as extended heat waves and drought conditions for days on end impact the lowest strata of the Indian economy, in particular, the farmers and peasants working under harsh weather conditions with limited monetary investments and exposed to the elements

By Salam Rajesh

The macroeconomic damages from climate change are six times larger than previously thought, say authors Adrien Bilal and Diego R Känzig in their latest publication “The macroeconomic impact of Climate Change: Global vs Local temperature” (National Bureau of Economic Research, Cambridge, 2024).

The authors obtained temperature data from the Berkeley Earth Surface Temperature Database, complementing the local temperature measures with global mean temperature data secured from the National Oceanic and Atmospheric Administration (NOAA) to support their finding.

Climate change originates with a rise in global mean temperature, the authors re-assert, stating that this change in global temperature affects the Earth’s climate system as a whole, causing changes in weather patterns, ocean currents and atmospheric conditions, which in turn influence the frequency, intensity, and distribution of extreme weather events globally.

In the mid-1950s to the mid-1970s, the global average temperature remained relatively stable at around 14°C, however, from the late 1970s onward, the global average temperature began to steadily rise, the authors observed.

What drives these variations in temperature around the trend? The authors suggest that geosciences literature indicates two types of causes: firstly, external causes such as solar cycles and volcanic eruptions leading to short-run fluctuations in the Earth’s mean temperature, and secondly, internal climate variability – interactions within the climatic system itself that lead to irregularly recurring events – affects temperatures.

To come up with their finding, the authors compiled a dataset covering 173 countries over the period of the last 120 years to study the effects of temperature on the economy. Based on temperature anomaly data at a spatial resolution of 1◦ × 1◦ of latitude and longitude, the authors constructed real-time population and area-weighted temperature measures at the country level.

Quite interestingly, quoting the National Oceanic and Atmospheric Administration (2023), the authors asserted that the El Nino-La Nina cycle varies unpredictably between two to seven years and substantially affects global mean temperatures and weather extremes.

The El Nino–La Nina processes in the Indian Ocean are largely seen to contribute to weather patterns that have implications for the Indian subcontinent. Depressions and subsequent cyclonic formations in both the Arabian Sea and the Bay of Bengal as consequences of El Nino have seen tremendous implications in North East India recently, with Manipur reeling under the impact of severe cyclone Remal last month.

The weakening of El Nino during June and the gradual takeover by La Nina was anticipated by the weather and climate scientists, in which case normal monsoons for the subcontinent can be expected, the scientists forecast. If in case El Nino prolonged or lingered on for a few more months, there would be an evident disturbance in the normal monsoon flow with the prospects of rainfall deficit this season and the onset of drought-like conditions in many parts of the country.

For those closely monitoring the climate concerns, Adrien and Deigo assert that changes in economic activity may affect short-run variations in temperature where the decline in economic activity may lower emissions and temperature, and hence can increase the output going forward. This mechanism leads to a reverse causality threat, the authors say.

The typical year-to-year fluctuations in carbon dioxide emissions are of the order of two gigatons according to the authors, where after accounting for oceanic and biosphere absorption, these annual fluctuations translate into 1 gigaton of atmospheric carbon dioxide. This magnitude corresponds to 0.15 part per million (ppm) in atmospheric carbon dioxide concentration, the authors stated.

The results of their study corroborate their interpretation that global temperature shocks are driven by external causes and internal climate variability and have a large causal effect on world GDP, the authors reassert.

Leaning further, the authors reveal that global temperature has much more pronounced impacts on economic activity than local temperature, where the ‘estimated effects of global temperature shocks are about seven times larger than for local temperature shocks, based on the same empirical model and the same sample period’.

This then filters down to the question on why global temperature causes more economic harm than local temperature.  On this singular assessment, the authors opine that temperature shocks affect the occurrence of extreme weather events, such as extreme heat, extreme precipitation, and extreme wind, and for this reason, the local temperature shocks lead to an increase in the share of extreme heat days. However, global temperature shocks lead to a substantially larger increase in extreme heat days, the authors stressed.

On this very note, the authors are of the opinion that consistent with the geoscience literature, it is calculated that wind speed and precipitation are outcomes of the global climate – through oceanic warming and atmospheric humidity – rather than the outcomes of local temperature distributions.

Through the analysis of their study on the impact of global temperature shocks in different regions across the globe, the authors observed significant negative effects in most regions. They estimated the strongest negative effects in relatively hot regions such as Southeast Asia and Sub-Saharan Africa. And, contrary to local temperature shocks, the authors documented that global temperature shocks lead to adverse economic effects even in higher-income, colder regions.

This analytic assessment can draw a parallel in India where extreme weather conditions such as extended heat waves and drought conditions for days on end impact the lowest strata of the Indian economy, in particular, the farmers and peasants working under harsh weather conditions with limited monetary investments and exposed to the elements.

To quote the authors without malice, in welfare terms, the “cost of climate change is 640 times the cost of business cycles or ten times the cost of moving from current trade relations to complete autarky. Perhaps most strikingly, in terms of output, capital, consumption, and thus welfare, climate change is comparable in magnitude to the effect of fighting a major war domestically. However, climate change is permanent. Thus, the losses from living in a world with climate change relative to a world without it are comparable to fighting a major war domestically, forever”.

In a nutshell, then, the findings come to the level of forewarning that unless the world community finds the means to halt the steadily rising global temperature, then the world is in for much worse times than what is being already experienced today.

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