The economic impact of global warming

The costs of Global Warming are tremendous, estimates of course vary but most figures put out are in the trillions. So what does this mean for you and how are you directly affected by these costs?

It’s difficult to answer that question, because the first large-scale study of the economic impact of global warming wasn’t released until recently. But let’s look at some of the data we do have.

In 2007, scientists at the Carnegie Institution measured, over the past 20 years, the annual yields of the world’s six largest crops (which account for 55% of non-meat calories consumed by humans and 70% of total animal feed)—and found that increasingly warmer temperatures led to lower crop yields. Those lower crop yields amounted to a net economic loss of $5 billion a year.

That’s good information, but there was one problem with the Carnegie Institution’s study, however: It looked backward. But by the time the Carnegie Institution’s study was released, another report had begun to gain notoriety: The Stern Review. In this 2006 report, Nicholas Stern, former chief economist of the World Bank, looked forward. His prediction: Climate change will have such a serious impact on economic growth that 1% of global gross domestic product (GDP) will be required to mitigate its effects. That’s a lot of money, given that GDP was almost $70 trillion in 2008, according to the World Bank.

Of course, that wasn’t the end of the discussion. Since the Carnegie Institution’s study and The Stern Review came out, numerous other studies have tried to quantify the economic impact of global warming. And most of these studies have focused on the negative economic impacts of global warming.

For example, in June 2008, the International Energy Agency (IEA) issued its Technology Perspectives report, which concluded that carbon dioxide emissions should be reduced by 50% from 2008 levels. To achieve this, the report projects that $45 trillion in financing will be needed over the next 40 years. That represents about $1 to $2 trillion per year in commercial investment financing.

Another example: In July 2009, Oxfam International released “Suffering the Science—Climate Change, People and Poverty.” This report—which used information gathered from the insurance industry to assess the economic impact of global warming—concluded that trade patterns will likely shift as climate change takes hold. Richer parts of the world will receive a boost, while poorer regions suffer. For example, Oxfam predicted that American agricultural profits will rise by $1.3 billion annually because of climate change, while sub-Saharan Africa will lose $2 billion annually as the viability of one of the region’s staple crops, maize, declined.

Some of these studies on global warming, however, point out that addressing global warming could be more costly that not addressing it. In June 2009, for example, Ben Lieberman, senior policy analyst for energy and environment at the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, testified before the U.S. Senate that the cap-and-trade approach to addressing global warming—in particular, the Waxman-Markey Cap-and-Trade Bill—inflicts “economic pain.”

“Higher energy costs kick in as soon as the bill's provisions take effect in 2012,” Lieberman testified. “For a household of four, energy costs go up $436 that year, and they eventually reach $1,241 in 2035 and average $829 annually over that span. Electricity costs go up 90% by 2035, gasoline by 58%, and natural gas by 55% by 2035. The cumulative higher energy costs for a family of four by then will be nearly $20,000. But direct energy costs are only part of the consumer impact. Nearly everything goes up, since higher energy costs raise production costs. If you look at the total cost of Waxman-Markey, it works out to an average of $2,979 annually from 2012 to 2035 for a household of four. By 2035 alone, the total cost is over $4,600. Beyond the cost impact on individuals and households, Waxman-Markey also affects employment, and especially employment in the manufacturing sector. We estimate job losses averaging 1,145,000 at any given time from 2012 to 2035. And note that those are net job losses, after the much-hyped green jobs are taken into account.”

Clearly, estimating the economic impact of global warming is no simple task, and is fraught with political discourse. But there is one sure sign that global warning is having an economic impact: Investors are starting to consider it an opportunity.

Sophisticated institutional investors, typically the first to jump on a new investment trend, have already recognized the opportunities that exist in the alternative energy space. According to New Energy Finance, total new global investments in clean energy were $33.4 billion in 2004, $58.7 billion in 2005 (76% growth), $92.6 billion in 2006 (58% growth) and $148.4 billion in 2007 (60% growth)—and they will continue to increase through 2030. Indeed, Jane Mendillo, president and CEO of Harvard Management Company, told SmartMoney in 2008 that the next big thing in the endowment world could be alternative energy.

And now retail investors are getting involved as well. A number of mutual funds allow average Joes and Janes to invest in companies that are seeking to mitigate the effects of climate change or helping the world adapt to them.

In fact, climate change could be the next big investing trend.

“Restructuring in the global economy according to principles of ecology represents the greatest
investment opportunity in history,” said Lester Brown, president of Chief Earth Policy Institute, in 2008.