Market impacts of climate change
Human civilizations have adjusted to existing climate conditions throughout their long history. A disruption of current climates, therefore, is likely to cause widespread impacts on human activities. Depending upon where the impacts are felt, one can classify climate change impacts into market impacts and non-market impacts. In this article, we focus on the market sector impacts.
Vulnerable market sectors
Some economic activities are more dependent on natural conditions than other activities. For example, agricultural production is believed to be highly contingent upon the climatic conditions of the farm whereas the information technology (IT) industry is perhaps affected little by changing climates. These effects of climate change that fall upon market sectors are called market impacts. Vulnerable market sectors include agriculture, animal husbandry, forestry, coastal cities, water supply, and energy consumption.
Agricultural productivity is shown to be highly dependent on both temperature and precipitation. An increase in temperature beyond a certain degree of warming is likely to add stress to the growth of crops. An increase in precipitation is generally beneficial to crop production. However, the effects vary by seasons. For example, summer temperature increase can be harmful while fall temperature increase can be beneficial by helping crops ripen. In addition, the direction and magnitude of impacts will highly hinge upon the initial climate of a farm's location.
Animal husbandry also depends on climates. A relatively mild and dry place such as southern Argentina, for example, is best suited for a commercial livestock operation. Forest management will be affected by changing climates as some trees will no longer be suited to the new climate while other trees become more relevant. For example, red maple, a widely populated tree across New England in the US, will move northward to Canada as temperature rises by several degrees. Economic impacts will be severe if climate changes abruptly giving no time for forests to adjust.
Energy consumption will also be affected. Warmer climates will increase the need for air conditioning in summer, but decrease the need for heating in winter. Overall impacts will vary by initial climates of the household locations. However, evidence shows an increase in energy demand in the US with warming. Water supply is also affected by climates. The impacts will depend on how precipitation patterns change and how evaporation rates change. For example, if there is a reduction in rainfall in currently dry Sub-Saharan Africa, there will be large economic damage. By allocating water efficiently, the damage from reduced precipitation can be minimized.
Coastal zones are clearly under threat by rising sea levels. Early literatures predict a sharp rise in sea level immediately. Later literatures recognize that people can adapt to rising sea levels by building walls if sea level rises gradually over the next century. People in coastal areas should choose whether to remain and build the walls or forgo the property and leave. The impacts, however, will hinge upon the mobility of the coastal population.
In summary, a balance of evidence indicates that many sectors of the current economy are vulnerable to climate change, although there are still opportunities to take measures to reduce potential damages. The impacts of climate change are expected to be much larger and harmful in the developing countries in Africa and Latin America due to limited adaptive capacities and heavy reliance on agriculture.
- Mendelsohn, R. (ed), Global Warming and the American Economy: A Regional Analysis. Edward Elgar Publishing, UK, 2001. ISBN: 9781840645934
- Nordhaus, W and Boyer, J., Warming the World: Economic Models of Global Warming. Cambridge, Mass: MIT Press, 2000. ISBN: 0262140713
- Tol, R. (2002) “Estimates of the damage costs of climate change. Part 1: benchmark estimates”, Environmental and Resource Economics, 21, 47-73.