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Bad weather ahead

SPECIAL TO BUSINESS DAY Thursday, June 15 2017

After US President Trump’s recent decision to withdraw from the Paris climate agreement, there has been much discussion on the effects of global warming and climate change on the world economy. Global warming refers to the rise in global average temperature. Climate change is how the climate in different areas around the globe changes over time, mostly due to this global average temperature increase and the changes that result to the water cycle, ice cover on land and in the polar oceans, and changes in land cover. Both global warming and climate change are bad news.

The rise in temperature due to climate change is expected to have a significant negative impact on the global economy. Unmitigated climate change is likely to reduce the income of an average person by roughly 23 percent in 2100, according to estimates contained in research publications. In fact, it is estimated that climate change will reduce average income in the poorest 40 percent of countries by 75 percent in 2100.

The overall aggregate effect of climate change on economic growth will most likely be negative in the long run. Global warming is expected to increase the frequency and severity of extreme weather events, bringing with it property and infrastructure loss.

Rising sea levels will also harm economic output as businesses become impaired and people suffer damage to their homes.

There would also be a fall in the productive capacity of the world economy. This would translate into a downward shift in world production. Higher global temperatures may also affect food security, promote the spread of infectious diseases and impair those working outdoors.

There may also be inflationary factors to consider. Agricultural yields are sensitive to weather conditions and as our climate becomes ever more extreme, more frequent droughts may reduce crop yields in areas where food production is vital. Higher global food prices will likely impact income in the process. As the level of warming becomes even greater, food price inflation would rise. Rising inflation may also materialise through reduced land availability. The surge in global temperatures may eventually cause some areas of the world to become uninhabitable and with this will come mass migration.

Alongside the political and socioeconomic implications of these moves will be higher demand for an ever decreasing amount of land. Higher energy costs are also likely to boost inflation. As our climate becomes more extreme we are likely to demand greater energy to cool both our working and living environments. Not only will energy demand change, but supply may shrink as the efficiency of existing power stations is compromised due to higher temperatures.

Internationally, the insurance industry already recognises that it is likely to bear much of the risk of global warming. Companies have already felt the force of extreme weather events on profits; from unseasonal floods to hurricanes.

Extreme weather-related damage to properties has seen insurance companies pay out to cover these costs.

The biggest losers in these global changes are the developing countries which are more likely to disproportionately experience the negative effects of global warming.

Not only do many developing countries have naturally warmer climates than those in the developed world, they also rely more heavily on climate sensitive sectors such as agriculture, forestry and tourism. As temperatures rise further, certain regions will face declining crop yields and will struggle to produce sufficient food for domestic consumption, while their major exports will likely fall in volume.

Overall, the increased frequency and severity of extreme weather will weigh on government budgets.

The aftermath of natural disasters often falls on authorities who are forced to spend vast amounts on clear-up operations and healthcare costs that come with experiencing extreme weather.

Revenue reductions may also be experienced by countries heavily dependent on tourism or on fishing, as those countries in the Caribbean are. After all Tobago is heavily dependent on tourism.

There are also other costs associated with global warming and climate change. These include energy costs of air conditioning, worn infrastructure, health problems such as heart attacks and malaria and dengue. Interestingly, a rapidly growing body of research examined whether human conflict can be affected by climatic changes and researchers found a strong link between climactic events and human conflict across all major regions of the world, as well as a link with personal violence and aggression.

Essentially, the climate is fundamental to our economy.

More extreme weather has the potential to weaken economic growth through damage to the capital stock and labour productivity will weaken as the world economy adjusts to higher temperatures. Inflation will rise through the growing cost of food, energy and insurance. Monetary policy can devote efforts to adapt to climate change to contribute to macroeconomic stability.

Standard inflation targeting approach should be modified to deal with persistent supply shocks –using countercyclical policies as reserve accumulation, exchange rate management, and perhaps a more extensive use of informed judgment. However, fiscal and industrial policy are better suited for controlling or mitigating the factors that lead to climate change. We need to understand how the changes in climate affect us here in Trinidad and Tobago and in what way these might impede our future prosperity.



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