Economic Impact of Climate Change

Penned By – Harshit Agrawal


The recently concluded International Conference on Climate Resilient Pakistan once again reminded the world of the devasting economic impact of the climate change. With the Pakistan’s economy performing poorly from last few years, the devasting floods of 2022 pushed it on the verge of bankruptcy. The climate change induced disaster caused an estimated loss of $3 billion on the country pushing almost 9 million (estimated) more people into poverty. Further, the floods prevented the debt-ridden nation from fulfilling the promises to IMF, leading to halting of the payment of $1.18 billion under the Extended Fund Facility (EFF) Agreement. As per the data available for the last week of 2022, the forex reserves are only adequate to pay for the following three weeks of imports. The common people of Pakistan are feeling the heat in the form of high inflation and energy crisis. 

Closer to home, in North Indian hill town of Joshimath, another story is spanning out. The town is literally sinking with the buildings developing huge cracks. Apart from the rampant construction activity, experts believe climate change to be a major culprit here as well. The incidents have crushed tourism industry which forms the 70 percent of the town’s economy. 

Both of the above examples are extreme cases where theeconomic impact of climate change could be directly witnessed. But recent research suggest that climate crisis is causing new challenges to the economy in multiple subtle ways.

Climate Change aa Driver for Inflation 

Current inflationary trends all around the world are attributed to liberal fiscal and monetary policy during the pandemic and supply chain crisis due to Russia-Ukraine war. But several experts believe that climate crisis is also a major factor behind the inflation which will become more profound in the coming years. The central bankers around the world thus need to carefully shape their policies to consider the climate change caused disruptions.

IPCC WGII Sixth Assessment Report suggests that global warming is affecting the agriculture yield both in land and ocean-based systems. Increasing temperatures and possiblechanges in water availability, soil erosion, and disease and pest outbreaks are causing the continuous decline in productivity of the soil. Dairy and meat-based industries’yield are also declining due to climate change induced reasons. Increasing salinity intrusion is causing high mortality in fisheries inducing projections of reduced yield in tropical and sub-tropical regions like South Asia. 

The Global Food Policy Report 2022 by IFPRI projects yields of India’s crops falling by 1.8 to 6.6 percent by mid-century (2041–2060) and by 7.2 to 23.6 percent by end-century (2061–2080) under a middle-of-the-road scenario for climate change. The report also projects a decline of 0.11% of GDP in Bangladesh only due to climate related issues in agriculture. Thus, climate change will lead to reduced global agricultural GDP due to declining yield and increase in consumer prices.Further, recent studies point out that these short-term supply problems in agriculture can lead to longer-lasting downward pressure on demand.

Reduction in labour productivity due to increasing heat is another factor which will lead to inflationary pressures in the global economy. Global warming directly impacts the availability of total labour working hours by varying the working hours limit to prevent direct impact of heat on health. The productivity of labour is also adversely impacted due to increased number of breaks under severe heat conditions. Studies have found that the industries with labour working in open conditions are more affected than others. Thus, sectors like agriculture and construction in countries like India and China will bear higher costs of climate change.

A report by International Labour Organisation (ILO) on the issue suggests that the world will see global productivity losses equivalent to 80 million full-time jobs in the year 2030 due to increased heat owing to climate change. These estimates are on the conservative side assuming that the global mean temperature will not exceed 1.5 degree Celsius.Another study indicates the variation in reduction of total labour across different regions with highest 25.9 percentage points in Africa and the least 10.4 percentage points in Americas in the low exposure sectors. Therefore, tropical and sub-tropical countries will witness higher rise in labour costs due to global warming in the coming years.

The Way Forward

In most of our minds, climate change is only an idea having no major bearing on the present generation. The above discussion contradicts the statement suggesting how increasing temperatures and weather variations will lead to trouble for policy makers and hardships to the common people. But the war is not all lost, with efficient and effective measures taken over time the cost of climate change could be substantially reduced. The measures though will come with the costs of their own.

Greenhouse gas taxes combined with incentives for households to adopt and invest in environment friendly technologies are some of the most discussed solutions on international forums. The critics of these policies often argue in terms of the loss of GDP because of implementing these policy decisions. A study by IMF published in World Economic Outlook 2020 however found that the policieswould slow global economic growth by 0.15 percentage point to 0.25 percentage point annually from the time of publicationuntil 2030. However, the economies will benefit by avoiding potential long-term losses from unchecked climate change which could be orders of magnitude larger according to some estimates. Thus, it is imperative for the countries around the world to implement climate policies now to ensure better economic future. 


The Economics and International Business Club of IIM Indore

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

Anjaney | Harshit | Krithik | Pranita | Ragavan | Srishti | Vishal

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