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If an environmental activist can’t seem to wrap their head around why the wealthy nations of the world aren’t doing more to try and prevent the worst effects of climate change, let them consider the answer that it’s potentially a tolerable cost of doing business.
No economist or financier needs to be told that a national economy, and to a much greater extent the global economy, is a dynamic and unstoppable social force consisting of millions and billions of individual actors making dozens of choices every day according to hundreds of calculations. Interrupting this flow of resources and ideas produces catastrophic consequences for standards of living in rich and low-income countries alike.
This can seem a shallow consideration to the archetypal environmental activist, who may see things like the balance of nature, the cultural richness of coastal areas flooded, or the potential extinction of thousands of species as things beyond mere value judgments.
However, in attempting to communicate the urgency of climate change, some researchers have tried to communicate the value of preventing climate change in economic terms, which aside from lacking the myriad of incalculable variables such as emerging technologies, has come up with hard dollar sums for the cost of inaction; and they’re not that bad.
In 2019, a landmark analysis published by The Economist Intelligence Unit’s (EIU) Climate Change Resilience Index found that climate change could directly cost the world economy $7.9 trillion by 2050. It quantified this by examining the world’s 82 largest national economies, and totaling their exposure to climate-related disasters, rising sea levels, crop failure, soil erosion, and more.
It would shave three percentage points of the global real GDP, averaged across continents, by 2050.
“The global economy is going to suffer so it’s not really a case of act now or act later. We need to do both,” analysis author and senior member at the EIU, John Ferguson, told AFP.
Important to this analysis, reported on by AFP and making headlines around the world, was the context that in terms of economic disasters, these numbers are just not that high; not least because this was averaged together with continents that don’t have the necessary infrastructure to protect themselves against rising sea levels or severe storms. North America and Western Europe averaged together would suffer a 1.3% real GDP loss by mid-century—the equivalent of a normal economic recession.
The cost of doing business
The appropriate comparison to a global economic shock as large as the worst-predicted effects of climate change this century would be some of the largest economic shocks this century—the 2008 Financial Crisis, the 2011 European Debt Crisis, the war in Ukraine, and the shocks resulting from government-enforced business closures due to COVID-19.
In a story about the most costly climate disasters in 2023, a year that scientists determined was the hottest average year on record, and credited it to human-accelerated climate change, Euronews reported on a study from the charity Christian Aid which found that the wildfires in Maui, Hawai’i, cost $4,161 per capita.
This simply pales in comparison to the economic cost of the last financial crisis in the US. In a study entitled ‘Will We Ever Recover?’ the San Francisco Board of the Federal Reserve found that the 2008 Financial Crisis cost every single American $70,000, more than 14 times the per-capita cost of the Maui wildfires, and 9 times the cost of every single disaster on the Christian Aid list for top 20 most expensive climate disasters in 2023.
By 2016, the Harvard Business Review writes that the 2008 Financial Crisis cost the country 15% in GDP growth that was estimated to have otherwise taken place; massive in comparison to a 1.3% cut by 2050.
The 2011 European Debt Crisis cost the Euro Area several consecutive quarters of GDP growth, amounting to a loss of 2.5% from the last quarter before the crisis to the last quarter in which a negative print was made, a period of around 24 months, and 0.7% more than the EIU’s cost of climate change over a period of as many years.
The war in Ukraine hampered global trade by the tens of billions after the West imposed a variety of sanctions and trade restrictions on Russia which resulted in multiple economic shocks including large raises in energy and grain prices. China’s long-term zero-tolerance strategy for fighting COVID-19 created a free-bleeding wound in Asia’s largest economy, in which local government debt spending surpassed $8 trillion in just 2022 during the long-lasting lockdowns. That debt will weigh on China’s growth-driven economy for years, and for these two events, the World Bank estimated that world GDP would grow just 2.7% that year (it would come out to 3.1%), down from 5.7% in 2021.
The GDP print was just a little different than the EIU estimations for climate change effects over 26 fiscal years in Asia, and the debt burden from China’s lockdown spending amounted to the entire cost of the EIU climate analysis for the whole world.
In 2023, the US government added $1 trillion in national debt in routine spending activity in under 60 days—hardly the kind of financial clout that could be bothered by a faction of a fraction of an $8 trillion climate change bill coming 26 years from now.
Apples to oranges
Climate, ironically, may not be the most damaging aspect of climate change to global economies. Today, the COP summits describe climate change more or less as something like general environmental degradation, or the gradual replacement of natural elements with man-made elements.
The World Economic Forum recently published an economic cost analysis where the cost comes from the loss of “ecosystem services” provided by animals, plants, and natural features, and in which the global economy faces annual losses of $2.7 trillion by 2030 if certain “tipping points” are reached regarding them.
More harrowingly, even in comparison to the damage caused by economic disruptions, the WEF suggests that 51 examined economies risk losing between 10 and 20 GDP percentage points by 2030’s end if “vital ecosystems collapse.”
This is where estimating the economic cost of climate action becomes difficult, because preventing the worst effects of 2°C of warming is different than preventing “vital ecosystems” from collapsing, with the latter having a much clearer list of necessary actions, such as protecting habitats that produce fish stocks and pollinators.
Some regions, such as sub-Saharan Africa and Southeast Asia would experience GDP contractions of 9.5%, mostly due to agricultural and fishery sectors collapsing.
All these calculations however rely on placing the inputs of today and extrapolating into the future, which isn’t sensible in economics because it doesn’t take into account innovation. The GDP of an Indonesia ten years into the future will include labor and capital for tackling the challenges of a changing climate differently than an Indonesia today. Flooding damage estimated today may appear grossly exaggerated if the people living by a major river simply move further inland before the worst increases in flooding intensity estimated by climate change come to pass.
The hard and soft rules of economic science make trying to warn about the costs of climate change in economic terms unimpactful to anyone who understands them. WaL
