How climate change affect economics



Climate change refers to the statistical variation in average weather patterns or properties that lasts for an extended duration of time often caused by human activities or vagaries of nature (Goulder & Pizer 5). On the other hand, (Ogbo 2) defines economics as one of the social sciences that seeks to understand the forces that come into play during production, distribution as well as the consumption of both goods and services. Over the years, a number of studies have been carried out to understand the interrelationship between climate change and economics bringing to the fore varying perspectives. Generally, the change in the world’s climatic patterns has been found to negatively impact on the capital productivity, functioning of the ecosystems, and even human health. As a result, several independent studies have concluded that Environmental degradation considerably affects the global economic growth prospects and consequently general well-being across the human race.

As early as the last century (20th) the prospect of change in global climate came up as a major policy issue especially with increased emissions of greenhouse gases (OECD 7). Increased surface temperatures, unpredictable precipitation patterns, reversed ocean currents as well as rise in sea levels have consistently altered the way and quality of life on planet Earth. However, as (Williamson et al. 10) observe, disagreements have always come up between and within nations on the best policy approaches in not only mitigating but entirely preventing the effects of climate change. Several measures regarding technology promotion programs, carbon emission taxes as well as emission trading programs have been put forth at both domestic and international levels with varying levels of success in their implementation. Overall, there is an urgent need for a normative and positive analysis of the existing policies with a keen focus on the economic underpinnings that result from the effects of climate change. This will be the core subject of the research study.

Study Exposition

  1. Estimating Damages of Climate Change

The biophysical consequences – rise in global temperature, heightened storm intensities — that result from changes in climate change often impact negatively on the human welfare (Williamson et al. 11). Such impacts are often classified into two by economists — non-market and market damages.

  1. Market damages

The National Conference of State Legislatures (6) notes that market damages result from the fluctuations in the quantities and prices of commodities that are supplied to the market. Recently, researchers have made use of climate-dependent functions in order to model and effectively grasp how climatic variables, like precipitation and temperature, affect the agricultural production levels. On the contrary, as (Stern 20) observes, some scientists have argued against the production function approach by pointing out that this model fails to take into consideration the possibility of product substitutes in the market. This scenario gives rise to the Hedonic Approach that casts the net wider to incorporate a range of product substitutes. The model provides for the use of cross-sectional data in examining the relationship between agricultural land and the individual climatic variables. In this model, the general assumption is that crop selection is meant to maximize rent which should in turn reflect land productivity relative to that of another marginal land (Stern 22). The approach also assumes that the value of the present land rents is equal to the land prices. Consequently, the impact of climatic variables on land prices serves as an indicator of the respective impacts on crop productivity while at the same time taking care of product substitution.

  1. Non-market damages

According to Gary (19) non-market damages include but are not limited to welfare costs attributable to the loss in ecosystem services or biodiversity in addition to the direct utility loss that stems from a less hospitable climate. However, OECD (4) points out that there are no ‘behavioral trails’, as such non-market damages lack viable preference methods of gauging the possible welfare changes. For instance, lack of biodiversity has no obvious connections to changes in prices or variations in observable consumer demands. In this vein, researchers mostly make use of interview techniques or any other preferred method to assess the willingness for payment in place of non-market damages.

  1. Climate Change and Economics

Economic research on matters climate change have since revealed that the impact of climate change strikes a considerable percentage of the global economy directly affecting energy, agriculture, tourism and forestry (OECD 7). The OECD review reveals that, economically, some countries will be more vulnerable to the effects of climate change than the global average, more so the developing countries whose economies are more inclined to agriculture. The compromise in agricultural productivity and profitability will further be compounded by the fact that these countries lie in low latitudes hence are likely to experience higher temperatures. Moreover, the quality of life, among animals, within these tropical regions, will be greatly affected (Stern 23). The lion’s share of the world’s endangered species will most likely be lost as the remnant few change their original places of habitation. Further, vector-borne diseases are likely to increase as well as heat stress occasioned by rising global temperatures. In the long run, the relief or prevention programs adopted by world countries could be economically unsustainable even with the mitigation measures in place. On the positive side, increased public health interventions could well keep the risks to a minimum. Additionally, since mortality rates attributed to winter conditions are way above deaths in summer; it would mean that rising temperatures will have little if any net effect on the overall animal health.

Whereas the impact on Agriculture across the African and other low latitude areas could be harmful, the reverse would be true across the medium latitude areas starting from the twenty first century (The National Conference of State Legislatures, 1). However, it’s worth noting that such consequences could be lower than earlier predicted or anticipated owing to adaptive mechanisms that would be embraced – crop and livestock selection as well as implementation of irrigation schemes in areas of hot climates. The situation could get even better as more and more farmers embrace modern farming techniques to boost production in China, Africa and Latin America (OECD 9). The National Conference of State Legislatures (2) singles out the forestry sector as among the economic segments starting to experience the effects of climate change. As the world grows wetter, warmer and with more Carbon (iv) Oxide supply the growth rates of trees will significantly improve. Profits accruing from the timber sector will definitely reduce in the long run as a result of increased production.

Recent improvements on research with regard to possible effects of climate change on the global economy have greatly helped scale down the expected damages (Organization of Economic Cooperation and Development, 65). Whereas some of the earlier studies had predicted that doubling of the greenhouse emissions would take away 2% of the global GDP by the year 2100, the latest research places the figure at a mere 0.2%. According to the recent reports, the earlier projects failed to put into consideration a number of factors: the integration of adaptive mechanisms; valuation of climate change against the then economic situation; possible benefits to be reaped from increased global warmth on agriculture, timber and tourism. Additionally, many of these studies did not take into account the probable behavioral changes with regard to market damage. By way of examining the impacts of climate change with respect to the current economy the researchers had effectively overestimated the relative sizes of the affected sectors as well as their representative fraction in the future economy. With reliable government support, the endogenous adaptation would rise and consequently result in reduced damages (Gary 26).

Moreover, the analysis of the economics involved in studying the effects of climate change reveals a dynamic path whereby the square of change in temperature is proportionate to the resultant impact (Goulder & Pizer 52). This means the impacts over the next few decades will be overly insignificant or will occur very late in the century. It, therefore, follows that an optimal policy involving a small start but gradually tightening the regulations would surely pay off. Further, the pair notes that the effects of unforeseen natural but catastrophic events could be even more lethal. The continued recession of Greenland ice sheets as a result of rising global temperatures, could, in the long run, lead to unprecedented rise in sea levels forcing mankind to retreat inwards. However, such costs would not be imminent or dramatic as it may seem since there would be ample time to effect relocations and construct new cities.

Policies to curb Climate Change

The resultant effects of climate change cannot be considered in isolation since the economy of each and every country is depended on that of its neighbors (Organization of Economic Cooperation and Development 70). It, therefore, follows that in order to adequately address the issue of climate change, the policy makers should incorporate both national and global perspectives. A combination of mitigation as well as adaptive measures should be put in place to minimize the emission of greenhouse gases. This could be made possible through the development and use of renewable energy sources as well as enhancing carbon sinks through reforestation programs. A shift in cultivation patterns could go a long way in adapting to the variation in weather conditions whereas erecting sea walls would help check against rising sea levels.


This study paper aims at bringing out the fact that there would be no significant impacts of climate change on economic growth for roughly the next half century. This is because the magnitude of such an impact would be considerably small to have any meaningful bearing on the global economy. Though global temperatures are expected to be on an upward trend for quite some time, the net market impact won’t exceed 0.5 meaning that it won’t be great enough to slow down economic growth during the 21st century. Though large scale annual losses could befall the society in the event of a catastrophic change in climate, such an eventuality, for now, may not warrant dramatic mitigation measures owing to the low probability associated with its occurrence.


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