What are the Likely Economic Effects of Climate Change?

This column examines the impact of changes in climate on detailed export data. If a poor country is one degree Celsius warmer in a given year, its exports are lower, by as much as 5.7%. While there is no effect on rich countries’ exports, their consumers will still suffer from reduced imports at higher prices.

Policymakers worldwide are wrestling with potential policy responses to climate change, including national and global cap-and-trade systems, fuel efficiency standards, research subsidies and other measures. Decisions on these issues can turn quickly as beliefs about the economic damages of climate change vary. If broad and aggressive economic damages are expected, aggressive measures may be called for. But if the expectations are for mild or narrow effects, the measures may be just as lukewarm. The more we know about what climate change might – or might not – do, the more accurately we can guide policy.

A “narrower view” argues that climatic change would affect agriculture but not much else. This view is hardwired into many mainstream climate-economy models, and therefore into the predictions that are often relied on by policymakers. Broader views move substantially beyond agriculture. For example, Montesquieu famously argued in The Spirit of Laws (1750) that an “excess of heat” made men “slothful and dispirited”, suggesting potentially broad labour productivity effects across many sectors. In fact, consistent with Montesquieu’s ideas, recent micro-analysis of the US economy shows that labour productivity declines in hotter weather (Graff-Zivin and Neidell 2010), especially in the absence of air conditioning, a finding that has also been established in laboratory settings (e.g. Hancock and Vasmatzidis 2003, Ramsey and Kwon 1992). More broadly still, climatic effects may extend to health, crime, conflict, and migration, all of which could have first-order implications for measuring the policy response.

One way to examine these effects – and without taking a stand on which micro channels might matter – is to look directly at any net effects on national economic growth. Historically, countries have warm and cold periods. They also have good and bad periods of economic growth. If weather fluctuations over time within a country are essentially random, then examining the historical association between idiosyncratic climatic shocks and growth episodes within countries can test whether climatic shocks have large or small economic effects. Together with Melissa Dell (Dell et al. 2008), we have taken this approach and find that warming has historically had negative impacts on economic growth – but only in poor countries. The effects in poor countries are remarkably large – with a 1 degree Celsius rise in temperature reducing economic growth by about 1.1 percentage points. Looking underneath national growth, the study also finds large effects on both agriculture and industrial value added, in addition to effects on aggregate investment, political stability, and innovation.

To further understand whether temperature affects only a narrow slice of economic activity, or instead has much broader effects, we turn to data on a country’s exports. Unlike data from the national accounts, which for most countries break down economic activity only into broad sectors like agriculture, industry, and services, export data is naturally collected at very fine levels of detail. To the extent that temperature shocks do not differentially affect domestic demand for particular goods, this export data can help us understand the sectoral composition of temperature’s impact on production.

In Jones and Olken (2010), we examine historical data relating national weather variation to export performance. Specifically, we look at how idiosyncratic annual temperature changes in a country explain that country’s export growth for particular products, holding constant worldwide trade patterns for each product and worldwide temperature changes. We use data on exports to the whole world and, for more finely disaggregated sectors, data on exports to the US. The findings confirm large negative impacts of temperature on poor countries. On average, we find that a poor country being 1 degree Celsius warmer in a given year reduces the growth of that country’s exports by between 2.0 and 5.7 percentage points in that year. As in Dell et al. (2008), we find no effect on rich countries’ exports. The fact that exports are even more sensitive to temperature than overall GDP is consistent with the idea that domestic consumption is relatively steady, so that volatility in domestic production translates into greater volatility in net exports.

When we examine the industrial breakdown of temperature’s impacts, we find substantial negative impacts not just on agricultural exports, but also on light manufacturing exports, such as electronic equipment, footwear, wood manufactures, and travel goods. We find little apparent effects on heavy industry or raw materials production. While the negative impact on agricultural exports is consistent with the primary thrust of the climate-economy literature, the negative impact on manufacturing provides further evidence that climate’s impact on economic activity may be much broader than conventionally implemented in climate-economy models that seek to guide policy.

A further advantage of using export data is that it alleviates concerns about data quality in poor countries. In particular, several recent studies have questioned the validity of poor country GDP data (e.g. Deaton 2005, Young 2009). Since export data (particularly exports to the US) is recorded by the importing country (e.g. the US), and measured with a high degree of accuracy at the importing ports, export data are likely to be much more reliable than national accounts data, particularly for poor countries. The fact that we find qualitatively similar impacts in the export data as in the national accounts data suggests that the effects we are picking up are, indeed, real effects rather than data artefacts.

The fact that temperature affects exports suggests that trade is also an indirect channel through which climate change may affect the world economy. Climate change may therefore decrease welfare in rich countries not by affecting production directly but by raising prices and reducing quantities of goods imported from poorer countries. Analysing the welfare consequences for rich countries is an important trajectory for further work.

References

•Deaton, Angus (2005), “Measuring Poverty in a Growing World (or Measuring Growth in a Poor World)”, Review of Economic and Statistics, 87(1):1-19, February.
•Dell, Melissa, Benjamin F Jones, and Benjamin A Olken (2008), “Climate Shocks and Economic Growth: Evidence from the Last Half Century,” NBER Working Paper 14132.
•Graff Zivin, Joshua, and Matthew J Neidell (2010), “Temperature and the Allocation of Time: Implications for Climate Change,” NBER Working Paper 15717.
•Hancock, Peter and Ioannis Vasmatzidis (2003), “Effects of heat stress on cognitive performance: the current state of knowledge”, International Journal of Hyperthermia, 19(3):355-372.
•Jones, Benjamin F and Benjamin A Olken (2010), “Climate Shocks and Exports,” American Economic Review Papers and Proceedings, forthcoming May.
•Montesquieu, Charles de (1750), The Spirit of Laws.
•Ramsey, Jerry and Yeong Kwon (1992), “Recommended alert limits for perceptual motor loss in hot environments”, International Journal of Industrial Ergonomics, 9(3):245 – 257.
•Young, Alwyn (2009), “The African Growth Miracle”, LSE Working Paper.

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