Climate change & the global economy

By Manuela Andreoni (New York Times)

Economists would like a word

This week, a high-profile World Bank report warned that the global economy is expected to slow to a pace we haven’t seen in 30 years.

The reasons are varied, as my colleague Alan Rappeport reported. The pandemic, the war in Ukraine and longer-term issues like weaker cross-border trade. But economists are worried that one factor slowing things down, now relatively small, may weigh more heavily in the future.

You guessed it: climate change.

Today I want to talk about how global warming is expected to affect economic growth, and how a slump could hinder efforts to fight warming. It’s a kind of vicious circle.

It’s important to note that growth has a downside. Unrestrained consumption is a major factor behind climate change. And growth policies aren’t the only levers that governments can use to raise people up.

But, overall, economic growth has been a key driver of rising standards of living for decades, ensuring that each generation was better off than the one before. That pattern may now be broken.

The big picture

World Bank economists are mainly concerned about disasters fueled by climate change.

In addition to human suffering, they calculated that, in the past two decades, disasters caused a significant decline in countries’ abilities to expand their economies.

Extreme weather events destroy infrastructure, which means governments are forced to spend money rebuilding rather than investing. And investment is the main tool governments have to stimulate economies.

On average, a major disaster reduces a country’s growth potential by 0.1 percentage point for the year in which it happened, according to the bank. That might not seem like a lot, but it is, experts told me. Consider the fact that global growth runs just above 2 percent a year in general.

Medium-term effects vary widely. They depend on both the size of the disaster and how vulnerable countries are. Some countries may survive almost unscathed, while others may lose up to 10 percent of gross domestic product.

“The medium-term impact depends on the policy response,” Franziska Ohnsorge, one of the authors of the World Bank report, told me in an email. “A rapid, large-scale reconstruction effort may mitigate some of the early damage to potential growth.”

But, as the world warms and climate disasters become more common, they will weigh a lot more on the economy, especially for small, vulnerable countries.

The sad thing is that this hurts “the weakest part of the global economy,” said Ugo Panizza, a professor of international economics at the Graduate Institute, a higher education institution in Geneva.

This means climate change is yet another factor that widens the gap of economic power between countries.

What’s happening now

Slow growth is already depleting economic resources.

As my colleague Alan told me, the World Bank report is troubling because policymakers had hoped growth would help lift people out of poverty and “provide governments with the economic firepower that they need to reverse global warming.”

Typically, when economies slow down, government budgets shrink and the first thing to get cut is investment.

It’s politically easier to cut something that will have an impact in the future, than, say, gasoline subsidies, which would hurt people’s pockets now.

This means fewer renewable energy power plants being built, no money for that badly needed sea wall, nor training programs for the electricians who might install heat pumps and solar panels.

Investing in climate mitigation would help

Pouring money into efforts to address global warming is actually good for business and would help countries overcome the global slump in growth, the report said.

But what we are left with, as Panizza pointed out, is a paradox. Climate change is affecting growth, growth is affecting investment, and investment is exactly what we need to fight climate change.

What gives?

The bank said in its report that pushing the private sector to increase investments in the green transition worldwide has become even more necessary. Providing some form of debt relief for low-income countries trying to finance green projects would help, too.

Global cooperation on climate is also important. Cooperation between countries, like trade agreements, was one of the keys to the previous decades of sustained growth.

Some of these are ideas the developing world has been pushing for in international negotiations for years, and yet here we are. Much of the $100 billion rich countries promised in climate finance exists only on paper.

All in all, Shanta Deverajan, a professor of international development at Georgetown University, told me “the message is depressing.”

Except, he said, for one thing.

“This strengthens the case for the green transition,” Deverajan said. Pushing for it isn’t just a policy to “reduce climate change, but it’s to actually enhance growth in the long run.”