Story Of The Week

Climate Change & the Economics Attached !

As defined by NASA, “climate change is a change in the usual weather found in a place”. This could be a change in the rainfall pattern, temperature, etc. of a particular place. When such phenomena occur at a global scale, it affects the climate of the entire globe over a period of hundreds, or even millions of years.

But, why should we even bother about that? This is because climate change has resulted in the earth getting warmer at an alarming rate and this could lead to undesirable repercussions in future.

Climate change is primarily a result of the greenhouse effect, which, although necessary for the survival of humankind, has gone out of proportions leading to global warming. As stated by the Intergovernmental Panel on Climate Change (IPCC) in its fifth assessment report, scientists were 95 percent certain that humans are the dominant cause of global warming.

The term climate change has been in the limelight of late and has been making the headlines almost every single day. It is a phenomenon that has united the entire world to act towards development of various policies and goals which are implementable and sustainable. The sheer magnitude of urgency that has been assigned to this phenomenon, in itself speaks volumes about the consequences that entail it, should mankind fail to act on time. A lot has been talked about with respect to the ill-effects of climate change on the environment. However, it should not be inconceivable at all that a phenomenon of such enormity has immense impact on the entire world’s economy as well. We are all quite familiar with the ecological perils of climate change and they are quite imaginable. However, let us delve a bit into the economic aspects of this phenomenon.

As concluded in a recent study by Stanford and Berkeley, which was done on the economic data of 166 countries from the years 1960 to 2010, overall economic output and efficiency of fundamental factors of production in modern economics such as labour and land have a dependency on the local temperature existing in any particular place, and they exhibit a non-linear relationship. The study reveals that there are certain temperatures at which humans are more efficient and more productive. The optimum average annual temperature of an economy for maximum productivity, as concluded by the study, was identified to be 13­­­oC. It is therefore deducible from this study that countries with average annual temperatures below the optimum 13oC (like Canada, Russia, Sweden, Norway, etc.) may benefit economically from an overall rise in temperature while the rest of the world may witness a fall in their economic output. If the past patterns of economic output were to continue, climate change would result in a drop of global economic output by 23 percent at the end of the century (year 2100). It would also lead to increase in income gaps. Global superpowers like the US and China could witness a drop in their GDP by 36 percent and 42 percent respectively. India stands to be amongst the worst affected by climate change with an estimated economic output drop of 92 percent by 2100 as compared to estimated GDP levels without climate change prevalent at that particular time. The following figures show the results of the study diagrammatically.



Source: Stanford University

As can be seen from the above figure, about 77% of the world’s countries could be adversely affected in economic terms by climate change. Further, the likelihood of climate change reducing the world’s GDP by more than 20 percent was at least 40 percent. It would cost the world a total of 4 percent of the GDP by 2030 in tackling climate change. These costs are only going to rise with passing time, and therefore, it is of immense importance that an actionable and sustainable plan be developed soon.

Another economic proposal that has taken birth during the era of climate change and which many economists favour is Carbon Pricing– putting a price on each ton of carbon dioxide emitted into the atmosphere. A higher price on carbon-based energy sources would put an added incentive on the various emitters of the greenhouse gas to shift to greener sources of energy. Carbon pricing has various economic benefits ranging from innovation (which would give birth to greener and more sustainable energy solutions), revenue generation and reduction of social costs (toward health). This idea has been met with a lot of enthusiasm and recently, a Carbon Pricing Panel consisting of members such as Angela Merkel and François Hollande among other global leaders was setup. The objective of the panel is to bring on board as many nations, states, cities and businesses as possible to adopt carbon pricing. As of today, some 40 countries, including China, have already adopted carbon pricing and they account for 12 percent of the global emissions. The framing of a good policy at the earliest in regard to carbon pricing would enable private players to plan ahead and make long-term investments accordingly, thus setting the path for a better future.

The upcoming Paris Climate Conference to be held from 30th November-11th December would be of utmost importance as it would be the first time the parties aim to achieve a legally binding and universal agreement on climate change, with the aim of keeping global warming below 2°C, above pre-industrial levels. Topics such as carbon pricing and sources of financing the costs involved in mitigating climate change, among others, would be at the heart of discussions in the conference. India has already submitted its Intended Nationally Determined Contribution (INDC) before the conference of parties under the UNFCCC and it aims to reduce its emissions by 33-35 percent of GDP by 2030 from 2005 levels and achieve 40% of its electricity generation capacity from renewable sources.

Climate change has occupied the centre stage of discussions in the world now and global leaders are more willing to come together and act toward mitigation of this undesirable phenomenon (as was demonstrated by the breakthrough climate deal struck by the US and China recently). The measures taken today have a huge cost, but the cost of inaction would be far greater and would have grave consequences in the future. So let us all do our bit toward mitigation of climate change, because, it’s a million drops that make an ocean!



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