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A truck is submerged in flood waters following flash floods at an inundated area in Garissa, Kenya, on May 8. Researchers at Harvard University and Northwestern University found previous estimates of climate change underestimated the macroeconomic damage of extreme weather, which not only hits productivity but also depletes capital.LUIS TATO/Getty Images

John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).

Ever since economist William Nordhaus established the macroeconomics of climate change in his 1992 work estimating the long-term economic effects of climate change, most studies coalesced around the view that for every degree of global warming, the world economy would contract by 1 or 3 per cent – challenging, but manageable.

However, recent studies have begun questioning the consensus and predicting much deeper falls in output, in part because the planet is warming faster than earlier assumed. Now, a new paper released this week from the U.S. National Bureau of Economic Research may shatter the orthodoxy altogether.

Climate change will eventually reduce the value of the global economy by almost one-third, according to Harvard University’s Adrien Bilal and Diego Kanzig of Northwestern University.

Their paper, “The Macroeconomic Impact of Climate Change: Global vs. Local Temperature,” represents a departure from previous studies.

When the macroeconomics of climate change first emerged as a subdiscipline, its practitioners tended to take scientific estimates of expected future warming and then model the effects on a country-by-country basis, focusing only on the productivity effects of rising temperatures.

But it’s becoming clearer that extreme weather is one of the main channels through which climate change is affecting the economy. Having found that the incidence of extreme weather correlates more closely with global than national temperature changes – storms and droughts don’t respect borders – this study builds a new model that estimates this effect.

They found that previous estimates of climate change considerably underestimated the macroeconomic damage of extreme weather, which not only hits productivity but also depletes capital. Once this is factored in, what emerges is a world economy that would be 31 per cent poorer by the end of this century.

Moreover, they argue, the damage has already begun. Had there been no global warming since 1960, they reckon the world economy would be 37 per cent bigger than it is today. We do know that the global growth rate has been slowing, especially in Western countries. A recent article in London’s Financial Times listed Canada at the top of the “breakdown nations” – former “model” economies – leading the world economy backward. There’s considerable discussion as to what’s causing this reversal, but there are growing reasons to think that the feedback loops of climate change are only just starting to wreak havoc on our economies.

Because we’re still in the early stages of this cycle, the damage will worsen. The trend line in the number and severity of extreme weather events and zoonotic pandemics has been rising for decades, and we haven’t yet repriced assets to allow for the future impact of climate change. While the authors say their paper can’t estimate the effect, a clue of what’s coming may lie in the sharp and sudden inflation that’s happening in insurance policies. Our future may be one in which we have to spend more money repairing roads and homes, pay higher taxes to cover the bills, and watch the value of our investments fall.

Most importantly for Canadian audiences, their model suggested the differences across countries won’t be as significant as previous models predicted. While warmer and middle-income countries are expected to suffer a little bit more, all countries are likely to be hit. After all, extreme weather doesn’t discriminate between rich and poor countries. Canada won’t get a pass.

In rich countries, there is a lot more infrastructure to be damaged by extreme weather, and older populations will be more vulnerable to its effects, raising social and health care costs. Following global temperature shocks, capital and investment are depleted and productivity falls, making the bounce-backs from environmental shocks progressively slower.

Carbon taxes should ideally mirror the social cost of carbon – the economic damage done by the addition of carbon to the atmosphere. Canada’s carbon tax just rose to $80 a tonne. Previous estimates of the social cost of carbon put it in the $100-200 range. This new study suggested it should be much higher, though, above $1,000, and that if we don’t pay it now, we’ll pay it later.

How much would we have to pay later? Profs. Bilal and Kanzig calculate that if we stay on our current course, the eventual economic price would be equivalent to fighting a domestic war, forever. The next time someone suggests that we should fight climate change only if the price isn’t too high, you could ask them what price they’d be willing to pay not to live in an eternal Ukraine or Gaza.

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