Climate Crisis

Climate change has the potential to do significant harm to the global economy, and poses catastrophic risks. The risks and damages are not simply a matter of geopolitical borders. One country's carbon emissions affect everyone in every country by adding to the whole of heat-warming gases in the earth's atmosphere which trigger a warming climate.

At the same time, the damages caused by climate change are also not tied to geopolitical borders, and often countries with the lowest emissions are the ones with the greatest devastation. The "global south", which make up only a tiny fraction of the global carbon emissions, will likely take on the brunt of climate change, with risks to their very specific macroeconomics and people, including extreme weather, displacement, food insecurity, and disease. The infrastructure in these low-to-middle income countries will need to be upgraded to enhance their economic resilience.

Economic Development in the Era of Climate Change

Carneige Endowment for International Peace

Laurence Chandy | January 4, 2023

Why are some countries richer or poorer than others? This is the motivating question that underpins the study of development economics. A rich literature has sought to identify the “deep determinants” that best explain comparative economic performance over the long term. That search has increasingly boiled down to a focus on geography and institutions. A country’s geography affects its economy through multiple channels including agricultural productivity, disease vectors, and proximity to markets. A country’s institutions, defined here as the rules and norms that govern society -- including those imposed by external actors -- affect the incentives individuals face to engage individually or collectively in productive activity. Which of the two is the dominant factor cannot be definitively resolved empirically, and so it is partly a matter of opinion. Nevertheless, the majority opinion, and the weight of evidence, backs institutions.

Could climate change shift the dial toward geography? Recent research, focusing specifically on the effects of climate change on average temperatures, points in this direction. Temperature has been found to affect income via agricultural yields, the physical and cognitive performance of workers, demand for energy, as well as the incidence of crime, unrest, and conflict. By one account, in the second half of the twentieth century, an average temperature rise of 1°C in a given country and year caused per capita income to fall by, on average, 1.4 percent. Critically, the effect persisted once the temperature shock was over, thus affecting a country’s economic performance over time.

Subsequent research has shown that the relationship between changes in temperature and income is nonlinear. Thus, while global warming could spell greater economic productivity for countries whose average annual temperatures are low, rising temperatures augur increasingly dramatic falls in productivity in countries with already warm climates.