Cooling effects of global warming

Climate change was long considered a slow-moving structural shift, with the bulk of the impact falling well beyond the horizon of most economic forecasts, but this is changing fast and decisions made at the upcoming COP25 in Madrid will matter for the near-term.

Michala Marcussen, Group Chief Economist and Head of Economic and Sector Research

14/11/2019

In the course of 2019, climate change increasingly made economic headlines. The most spectacular images came from extreme weather, and while not all weather occurrences are due to climate change, most experts agree that this increased incidence hereof is. The direct damages caused by extreme weather has increased significantly over past decades, averaging just over $250bn over the past five years (up to 2018) compared to $50bn in the early 1980s, in constant terms.

For macro economists, the damage from such extreme weather has historically primarily been viewed as transitory, coming first with an economic cost and then a lift as damage was repaired and lost production recouped. Some loss is evitably permanent, and not least the tragic loss of life or forced migration. Climatologists predict that the occurrence of extreme weather will only get worse, tipping the balance to more disruptive and more durable negative consequences. Central bankers are understandably concerned by the financial stability implications hereof.

2019 also saw forest fires in Brazil take centre stage in the realm of trade policies with several European leaders threatening that insufficient action by the Brazilian authorities to halt the blazes, would threaten the trade deal between the EU and the Mercosur. Climate change is indeed fast making its way up the list of policy priorities, and not least driven by the fact that electorates are beginning to prioritise the issue, both in the ballot boxes and in terms of their consumer preferences.

Earlier this year, changes to emission standards notably dented the auto sector in Germany as producers adjusted to new norms and in some cases sought to rebuild reputations tarnished by emission scandals. While difficult to quantify, there is also evidence to suggest that consumers may be delaying new car purchases in anticipation of more efficient technologies or abandoning the idea of car ownership all together, favouring sharing and other alternative transport solutions. As automakers adjust to this new reality, the impact will be felt throughout global supply chains.

Autos are, moreover, not the only sector experiencing such change; a comeback for train travel, a new fashion for vintage clothing and lower meat content in diets spring to mind. These changes are still having only a modest impact at the macro level but as trends spread across different demographics and geographies, far more significant implications will result. Corporates are adapting hereto, encouraged by consumers and investors. New technologies can help but retraining the labour force to new roles and ensuring sufficient flexibility for new jobs to emerge will require determined support from public policies.

A further opportunity for public policies is to influence price setting and regulation to further nudge consumers and corporates in the right direction. Addressing the distributional impacts of climate change must also be a key priority. Here, public investment programs, be it for infrastructure or education, could make a notable difference, with potential to lift growth over both the shorter and longer-term horizons.

Looking ahead to 2020-21, the global economy is fast losing momentum and while there is clearly opportunity for climate change to make a positive contribution to economic growth, this requires a more determined effort than currently observed on the policy front. As matters stand, it seems the global warming is likely to have more of a cooling effect in 2020, but hope remains that the Santiago COP25 delivers an upside surprise.