Comments on the first order draft were few:
C: This subsection could give more emphasis to the value of carrying out a multi-sector, consistent integrated assessment, beyond the single impact assessment.
R: Added: Ignoring these effects would lead to biased estimates of the impacts of climate change.
C: I suggest to add the following sentence: "Partial equilibrium models can be more detailed and realistic."
R: Sentence added.
C: The term 'of income' should be omitted. The results are in terms of welfare changes (percentages).
R: Income changed to welfare.
C: The author team should consider characterizing its degree of certainty in these conclusions through use of calibrated uncertainty language per the guidelines for authors.
R: Reject: These are qualitative findings; no uncertainty assessment has been published.
C: This section is highly relevant. In the conclusions possible lines of additional research in this area could be mentioned.
R: This is already done in Section 10.10
C: For this example, it would be helpful to specify the relevant climate/socio-economic scenario employed in the analysis.
R: Assessment was drafted as an example of robust findings across scenarios, and details of specific scenarios are not relevant.
C: The article of Barrios et al. (2010) on rainfall and growth could be considered. Barrios Salvador, Bertinelli Luisito and Eric Strobl, (2010), "Trends in Rainfall and Economic Growth in Africa: A Neglected Cause of the African Growth Tragedy", Review of Economics and Statistics 92(2):350-366, 2010
R: Reference added
10.9. Impacts on markets and development
Prior sections of this chapter present the direct impacts of
climate change on the economy sector by sector. There are, however, also
indirect impacts. The effects that impacts in one sector may have on the rest
of the economy are initially presented, followed by the impacts on economic
growth and development.
10.9.1. General equilibrium effects
General equilibrium analysis describes how climate change
impacts in one sector propagate to the rest of the economy, how impacts in one
country influence other countries, and how macroeconomic conditions affect each
impact (Ginsburgh and Keyzer, 1997). There are three channels
through which impact diffuse. First, outputs of one sector are used as inputs
to other sectors. For example, a change in crop yields would affect the
food-processing industry. Second, products compete for the consumers’ finite
budget. If, for example, food becomes more expensive, less money would be spent
on other goods and services. Third, sectors compete for the primary factors of
production (labor, capital, land, water). If more labor is needed in
agriculture to offset a drop in crop yields, less labor is available to produce
other goods and services. Firms and households react to changes in relative
prices, domestically and internationally. Ignoring these effects would lead to
biased estimates of the impacts of climate change.
General equilibrium models can provide a comprehensive and
internally consistent analysis of the medium-term impact of climate change on
economic activity and welfare. However, these models necessarily make a number
of simplifying assumptions, particularly with regard to the rationality of
consumers and producers and the absence of market imperfections. Partial
equilibrium models can be more detailed and more realistic.
Computable general equilibrium models have long been used to
study the wider economic implications of changes in crop yields (Kane et al., 1992). (Yates and Strzepek, 1998) show for instance that the
impact of a reduced flow of the Nile on the economy of Egypt is much more
severe without international trade than with, because trade would allow Egypt
to focus on water-extensive production for export and import its food.
Older studies focused on the impact of climate change on
patterns of specialization and trade, food prices, food security and welfare (Darwin and Kennedy, 2000; Darwin, 2004;
Kane et al., 1992; Reilly et al., 1994; Winters et al.,
1998; Yates and Strzepek, 1998). This has been extended to
land use (Lee,
2009; Ronneberger et al., 2009), water use (Calzadilla et al., 2011; Kane et
al., 1992),
and multiple stresses (Reilly et al., 2007). General equilibrium models
have also been used to estimate the value of improved weather forecasts (Arndt and Bacou, 2000), a form of adaptation to
climate change. Computable general equilibrium analysis has also been used to
study selected impacts other than agriculture, notably sea level rise (Bosello et al., 2007; Darwin and
Tol, 2001),
tourism (Berrittella
et al., 2006; Bigano et al., 2008), human health (Bosello et al., 2006) and energy (see 10.2).
(Bigano et al., 2008) study the joint impacts on
tourism and coasts, finding that tourism dominates the welfare impacts. (Kemfert, 2002) and (Eboli et al., 2010) estimate the joint effect on
the world economy of a range of climate change impacts, but conflate general
equilibrium and growth effects. (Aaheim et al., 2010) analyze the economic effects
of impacts of climate change on agriculture, forestry, fishery, energy demand,
hydropower production, and tourism on the Iberian peninsula. They find positive
impacts on output in some sectors (agriculture, electricity) negative impacts
in other sectors (forestry, transport) and negligible ones in others
(manufacturing, services). (Ciscar et al., 2011) study the combined impact on
agriculture, coasts, river floods and tourism in the current European economy.
They find an average welfare loss of 0.2-1.0% of welfare but there are large
regional differences with losses in Southern Europe and gains in Northern
Europe.
The following initial conclusions emerge. First, markets
matter. Impacts are transmitted across locations—with local, regional and
global impacts-- and across multiple sectors of the economy. For instance,
landlocked countries are affected by sea level rise because their agricultural
land increases in value as other countries face erosion and floods. Second,
consumers and producers are often affected differently. The price increases
induced by a reduction in production may leave producers better off while
hurting consumers. Third, the distribution of the direct impacts can be very
different than the distribution of the indirect effects. For instance, a loss of production may be
advantageous to an individual company or country if the competition loses more.
Fourth, a loss of productivity or productive assets in one sector leads to
further losses in the rest of the economy. Fifth, markets offer options for
adaptation, particularly possibilities for substitution. This changes the size,
and sometimes the sign of the impact estimate.
10.9.2. Growth effects
10.9.2.1. The rate of economic growth
Climate change would also affect economic growth and
development, but our understanding is limited.
(Fankhauser and Tol, 2005) investigate four standard
models of economic growth and three transmission mechanisms: economic
production, capital depreciation, and the labor force. They find that, in three
models, the fall in economic output is slightly larger than the direct impact
on markets while the 4th model (which emphasizes human capital accumulation)
points to indirect impacts that are 1.5 times as large as the direct impacts.
The difference can be understood as follows. In the three models, the impacts of
climate change crowd out consumption and investment in physical capital, while
in the fourth model investment in human capital too is crowded out; lower
investment implies slower growth. (Hallegatte, 2005) reaches a similar conclusion. (Hallegatte and Thery, 2007; Hallegatte and
Ghil, 2008; Hallegatte and Dumas, 2009) highlight that the impact of
climate change through natural hazards on economic growth can be amplified by
market imperfections and the business cycle. (Eboli et al., 2010) use a multi-sector,
multi-region growth model. The impact of climate change would lead to a 0.3%
reduction of GDP in 2050. Regional impacts are more pronounced, ranging from
-1.0% in developing countries to +0.4% in Australia and Canada. Sectoral
results are varied too, with output changes ranging from output of +0.5% for
power generation (to meet increased demand to air conditioning) to -0.7% for
natural gas (as demand for space heating falls) and rice.
Using a biophysical model of the human body’s ability to do
work, (Kjellstrom et al., 2009) find that by the end of the
century climate change may reduce labor productivity by 11-27% in the humid
(sub)tropics. Assuming a output elasticity of labor of 0.8, this would reduce
economic output in the affected sectors (involving heavy manual labor without
air conditioning) by 8-22%. Although structural change in the economy may well
reduce the dependence on manual labor and air conditioning would be an
effective adaptation, even the ameliorated impact would have a substantial, but
as yet unquantified, impact on economic growth.
There are also statistical analyses of the relationship
between climate and economic growth. (Barrios et al., 2010) find that the decline in rainfall
in the 20th century partly explains the economies of Sub-Saharan Africa
have grown more slowly than those of other developing regions. (Brown et al., 2011) corroborate this. (Dell et al., 2012) find that, in the second half
of the 20th century, anomalously hot weather slowed down economic growth
in poor countries, in both the agricultural and the industrial sectors. (Dell et al., 2009) find that one degree of
warming would reduce income by 1.2% in the short run, and by 0.5% in the long
run. The difference is due to adaptation. (Horowitz, 2009) finds a much larger effect: a 3.8% drop in
income in the long run for one degree of warming.
10.9.2.2. Poverty traps
Poverty is concentrated in the tropics and subtropics. This
has led some analysts to the conclusion that a tropical climate is one of the
causes of poverty. (Gallup et al., 1999) emphasize the link between
climate, disease, and poverty while (Masters and McMillan, 2001) focus on climate,
agricultural pests, and poverty. Other studies (Acemoglu et al., 2001; Acemoglu
et al., 2002; Easterly and Levine, 2003) argue that climatic influence
on development disappears if differences in human institutions (the rule of
law, education, etc) are accounted for. However, (Van der Vliert, 2008) demonstrates that climate
affects human culture and thus institutions, but this has yet to be explored in
the economic growth literature. (Brown
et al., 2011)
find that weather affects economic growth in Sub-Saharan Africa – particularly,
drought decelerates growth. (Jones and Olken, 2010) find that exports from poor
countries fall during hot years. (Bloom
et al., 2003)
find limited support for an impact of climate (rather than weather) on past
growth in a single-equilibrium model, but strong support in a
multiple-equilibrium model: Hot and wet conditions and large variability in
rainfall reduce long-term growth in poor countries (but not in hot ones) and
increase the probability of being poor.
(Galor and Weil, 1996) speculate about the existence
of a climate-health-poverty trap. (Bonds et al., 2010; Bretschger and Valente, 2011; Strulik, 2008) posit theoretical models and
offer limited empirical support, while (Tang et al., 2009) offers more rigorous
empirical evidence. This is further supported by yet-to-be-published analyses (Bretscher
and Valente, 2010; Gollin and Zimmermann, 2008; Gollin and Zimmermann, 2010;
Ikefuji et al., 2010). Climate-related diseases
such as malaria and diarrhea impair children’s cognitive and physical
development. This leads to poverty in their later life so that there are
limited means to protect their own children against these diseases.
Furthermore, high infant mortality may induce parents to have many children so
that the investment in education is spread thin. An increase in infant and
child mortality and morbidity due to climate change would thus trap more people
in poverty.
(Ikefuji
and Horii, 2012; Zimmerman and Carter, 2003) build a model in which the
risk of natural disasters causes a poverty trap: At higher risk levels,
households prefer assets with a safe but low return. (Carter et al., 2007) find empirical support for this
model at the household level, but (van den Berg, 2010) concludes the natural
disaster itself has no discernible impact on investment choices. At the
macro-economic level, natural disasters disproportionally affect the growth
rate of poor countries (Noy, 2009).
(Devitt and Tol, 2012) construct a model with conflict-poverty
trap, and show that climate change may exacerbate this. (Bougheas et al., 1999; Bougheas
et al., 2000)
show that more expensive infrastructure, for example because of frequent
repairs after natural disasters, slows down economic growth and that there is a
threshold infrastructure cost above which trade and specialization do not
occur, suggesting another mechanism through which climate could cause a poverty
trap. The implications of climate change have yet to be assessed.
10.9.2.3. Conclusion
In sum, the literature on the impact of climate and climate
change on economic growth and development has yet to reach firm conclusions.
There is agreement that climate change would slow economic growth, by a little
according to some studies and by a lot according to other studies. There is
disagreement whether climate change would affect the nature of economic
development, with some studies suggesting that more people may be trapped in
poverty and fewer people enjoying exponential growth.
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