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The interplay between climate and economy was one of the topics of the "Economics out Loud" podcast. Wasn’t the entire economic development since ancient times happening under the influence of climate change and hasn’t humanity overestimated its independence from the weather? Natalia Lamberova, a Professor at the University of Texas at Dallas, and Oleg Demidov, NES graduate and co-founder of CarbonSpace, a technology company that monitors greenhouse gas emissions, talked about the history and examples of the impact of climate on the economy; humanity’s ways of adapting to weather changes; climate’s impact on conflicts, institutions and culture; the price that humanity paid for global cooling and may now pay for global warming. There may be no bad weather, but research shows that not all weather is good for economic growth. GURU presents an interview based on the podcast episode.
Q: Let's start with a historical case that, in your opinion, clearly reflects the complex interplay between climate change and the economy.
Natalia Lamberova: There are quite a few such cases, but not all of them are documented, and the further we go into the past, the less data we have. An interesting case that is quite close to us and also well documented is the Industrial Revolution. It began at the end of the Little Ice Age (between 14th and 19th centuries), when it was much cooler than it is now, the glaciers were much larger, and the Gulf Stream was slower. In the 19th century, global warming began, which contributed to economic growth, which, in turn, also had an impact on the climate. As we know, the Industrial Revolution was accompanied by the active use of coal. Its small particles, accumulating on the surface of the Earth, made it darker, which caused more sunlight consumption, and glaciers that reflect light melted. All this led to an increase in temperature. On the one hand, we made the planet warmer, and on the other hand, this warming had a positive impact on agriculture, crop yield increase, which, in turn, contributed to urbanization and economic growth. Thus, it can be argued that humanity has shortened the Little Ice Age.
Oleg Demidov: I think the eruption of the Huaynaputina volcano in Peru in 1600 is a very good case. It led to global cooling of the climate, and it was in the 17th century that the most severe phase of the Little Ice Age occurred, which affected life in Europe. In Russia, for example, this was the time of the great famine, the Time of Troubles. It shows how events in one part of the globe can affect people's lives far, far away.
Q: Yes, this is another confirmation that we have only one Earth and a common climate. Natalia, you said that climate change and its impact on the economy in the distant past are poorly documented. But we can still see a correlation between the climate getting better and the improvement of the economic situation in different ages. For example, after the year 1000, global warming began, and it was the time of the revival of the European economy, growth of population and agricultural productivity, which eventually contributed to the Commercial Revolution of the 13th century. In short, nature came to life, and so did Europe. And the other way round, as it got cooler, the Little Ice Age began, and this cooling reduced economic growth (see, for example, The Economic Effects of Long-term Climate Change: Evidence from the Little Ice Age).
Natalia Lamberova: Of course, climate change has a huge impact on economic growth and on how societies are organized. If agriculture is developing, then GDP is growing, simply because it is included in GDP. But there are other effects as well: if agricultural productivity increases, more people can start producing something else other than food. They can move to the city, and urbanization leads to technological growth. Therefore, global warming in that time contributed to economic development.
There are also less obvious impact channels. For example, worsening climate can lead to an increase in morbidity: days of intense heat are accompanied by higher mortality among people with heart problems or suffering from respiratory diseases.
However, it is important to understand that it is not just a matter of whether it has become warmer or cooler, but how much the temperature has diverged from the climatic optimum. Thus, now global warming, which previously led to an increase in agricultural productivity, has negative consequences.
Q: What estimates of the cost of global warming for the economy do we have?
Oleg Demidov: There are quite a lot of them. For example, the World Economic Forum estimated that the economy is losing $16 million every hour due to warmer climate, and by 2050 it will lose from $1.5 trillion to 3 trillion annually, including the cost of maintaining infrastructure, agriculture, and healthcare. Approximately 53% of the total damage from extreme climate events is caused by anthropogenic factors. Today, experts are almost unanimous that human activity is the main cause of global warming.
Even if we meet the goals of the Paris Agreement and limit warming to 1.5 degrees Celsius, it will still have huge consequences. For example, even with such warming, we can lose a significant part of coral reefs, and therefore, at least 20% of all marine life will become extinct. Of course, climate change leads to a reduction in fertile land which will shrink by about 20% by 2050. The melting of glaciers leads to methane emissions, which further warms up the atmosphere. As a result, the Earth may lose a climatic equilibrium, and we will just not be able to do anything about it. There are even forecasts in which temperatures will rise by 5 degrees Celsius by the end of the century, which will have disastrous consequences for most countries.
Q: And which countries are more affected by global warming? Intuitively, it seems that the more developed a country is, the less it depends on agriculture and the less it should suffer.
Natalia Lamberova: This is a very interesting question. On the one hand, in countries near the equator, the temperature hardly changes. On the other hand, the temperatures are already high there, so a slight increase can move it to an area far from optimal. In the northern countries, the temperature changes more strongly, but they are further from the critical boundary too.
Indeed, the richer the country, the easier it adapts to the changing temperature: people there have air conditioners and money for landscaping, healthcare and economic adaptation.
Oleg Demidov: Of course, poor countries suffer more, simply because there are big problems with providing food to the population. But we must not forget that the modern food system is global. At breakfast, we drink coffee from Colombia or tea from India, eat bananas or avocados from Africa. And one of the key consequences of global warming is a decrease in the optimal zones for agriculture and, as a result, in the crops. This leads to an increase in prices, which can also affect certain groups of the population.
Q: The impact of higher temperatures on a country also largely depends on its location in general, and not only relatively to the equator.
Natalia Lamberova: Yes, this impact depends on whether the country is located on the coast or inside the continent and how far from the coast. Glaciers will melt due to global warming, sea level will rise, and countries on the coast will lose part of their territory.
In the 2021 research, Klaus Desmet and Esteban Rossi-Hansberg model the impact of climate on economic growth, based on the fact that this impact differs and so does their ability to adapt. They show that in some countries average wealth will fall by 5%, there will be many countries where it will shrink by 10%, and some countries in Latin America and Africa, and India will lose as much as 15%. There will also be winners – Canada, Greenland, part of Russia. For example, in Siberia global warming will improve conditions for agriculture.
The problem is that the countries that face the greatest losses are also poor and do not have the resources to adapt. We adapt to higher temperatures with the help of technologies, among other things. We do not know the potential influence of technologies and what they will be. But we know that at all times the main adaptation mechanism has been relocation to more favorable regions, and we can model its consequences. According to estimates by Desmet and Rossi-Hansberg, by 2200 the population of parts of Russia’s and Canada’s northern regions, and Alaska will increase due to migration (adding up to 81% compared to the baseline scenario), and in some territories of Latin America and Africa it will decrease significantly (up to 66%). The scholars give the following comment: we cannot predict technological changes for such a distant future, but we can model resettlement.
Q: In the past, such resettlement under the influence of climate led to conflicts and changes on the political map of the world. It swept away entire states.
Natalia Lamberova: That is true.
Q: And what does research tell us about the impact of climate change on conflicts? Oleg recalled the 17th century, this was the most severe phase of the Little Ice Age, and this was just a Pan-European cataclysm, the Thirty Years' War. In Russia, it was the Time of Troubles and a period of uprisings. Poland, Russia, Sweden, France, Spain, the Netherlands were all involved in wars. So, Europe was far from being a calm and peaceful place.
Natalia Lamberova: There is a research Winter Is Coming: The Long-run Effects of Climate Change on Conflict by Murat Iyigun, Nathan Nunn and Nancy Qian. It shows a strong correlation and causal relationship between the cooling and the growth of conflicts in the 500 years between 1400 and 1900. When the shortage of resources increases due to the colder weather and the return on land decreases, then more land is needed, and conflicts over territories begin. Today, a deviation from the climatic optimum will lead to conflicts, it is known that droughts may cause them.
Therefore, when you read all these excellent economic papers that analyze adaptation to climate change and model resettlement, the question arises: why is the cost of conflicts not taken into account in the calculations?
Q: When you were talking about adaptation, I recalled the words of the hero of the movie Interstellar: We’ll find a way, we always have.
Natalia Lamberova: We can think that we found it by just leaving the planet. (Laughs)
Q: Yes, we have the ability to find a way out and adapt. There was a very interesting paper by Andrea Matranga from Chapman University, a former NES Professor. He says that the very birth of agriculture was also a response to the climate challenge: on the one hand, the Ice Age ended, but on the other, seasonality became more pronounced, which caused problems for hunter-gatherers. Therefore, the incentive to store food was high.
Natalia Lamberova: At the same time, the very transition from hunting and gathering to growing food did not immediately lead to an improvement in the quality of life. The variety of food and the number of calories decreased as getting food was taking more time. People worked more and ate less. The quality of nutrition was declining, the quality of life was falling, we know that people became shorter after switching to agriculture. Of course, the question arises: why was it necessary to switch to growing food? And I really like the hypothesis that it was necessary to mitigate the weather changes.
Q: Jared Diamond has a paper The Worst Mistake in the History of the Human Race by which he means agriculture
Natalia Lamberova: On the one hand, that is true, on the other hand, he himself later wrote that the transition to agriculture allowed the Eurasians to dominate the world. For example, Europeans managed to colonize half the world.
Q: Let's talk about geographic determinism here. Diamond is quite a prominent representative of it. He does not write that geography and climate completely determine everything, but he shows that this was an important starting point that determined the path of evolution. In particular, he points out that Eurasia is a horizontally elongated continent, so agricultural crops spread faster. Africa and the two Americas are vertically elongated, there are many microclimates, which prevented the spread of crops. Meanwhile, Matranga writes: “Seasonality patterns 10,000 years ago were amongst the major determinants of the present day global distribution of crop productivities, ethnic groups, cultural traditions, and political institutions.” How much do you think geography still affects the development of societies apart from obvious channels, such as, say, the impact on agriculture or proximity to the sea?
Oleg Demidov: Of course, the impact is great. For example, China is an example of a monolithic country that is surrounded by mountains, and has a fertile plain in the center. This feature contributed to the rapid spread of technologies, including agricultural ones, which, in turn, accelerated population growth. China has historically been the most stable in terms of borders and the most populated (along with India today) country in the world. Yes, of course, this empire had periods of decline, by the 19th century it lagged far behind Europe, the previous century was very difficult for the country, but it was able to take advantage of the opportunity that globalization gave it and use its enormous human resources to become one of the leading economies.
Natalia Lamberova: I think that today the influence of climatic factors can be traced through their influence on institutions. In the famous paper Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution Daron Acemoglu, Simon Johnson and James A. Robinson discuss how the welfare of the European colonies was changing, and conclude that European institutions contributed to the acceleration of growth in them. They show that the risks of diseases had an impact on the willingness of Europeans to settle colonies and develop agricultural systems and labor markets there that would be free, not exploitative. Positive examples are the United States or colonies on the eastern coast of Australia. Meanwhile, in territories where the climate was not suitable for European settlement, the African “malaria belt”, colonizers created a system of extractive institutions to simply drain resources.
Another channel through which climate affects society is the nutrition specifics. Let's take for example potatoes, which appeared in the Old World after the discovery of America. Its influence was enormous. For example, as shown by Nathan Nunn and Nancy Qian, the spread of potatoes explains 25-26% of the population growth of the Old World from 1700 to 1900 and 27-34% of the increase in urbanization. We see a good example of a combination of a nutritious and low maintenance plant product and climatic conditions favorable for its cultivation.
Q: Yes, and an example of institutions that promote the introduction of new products. There is a similar article about the spread of corn in China. It failed to play the same role as potatoes in Europe, despite its mass spreading. As Shuo Chen and James Kai-sing Kung write, economic growth in Europe was driven by the introduction of not just one new technology, but a series of new technologies leading to a demographic transition and the development of new human capital.
Q: Can we talk about the even more profound influence of climate? Already in ancient times, people were curious about how nature affects societies. For example, the Chinese philosopher and politician Guan Zhong (720-645 BC) believed that large rivers affect the character of peoples, that fast and winding rivers make people loutish and warlike. Hippocrates believed that Asians are less warlike because of the moderate climate without weather fluctuations. Ibn Khaldun, the Arab Adam Smith, who lived back in the 14th century, argued that soil, climate and food determine whether people lead a nomadic or sedentary lifestyle, as well as their customs. Montesquieu was giving climate a large role in terms of the influence on society. Many historians have written that sudden changes in weather, short sowing period affected not only the Russian economy, but also the character: reluctance to wait, intolerance of uncertainty, fatalism, and ability to mobilize at the same time. And Vasily Klyuchevsky wrote that no people in Europe are capable of such hard work for a short time as Russians; and at the same time they are unaccustomed to even, moderate and measured, constant work. Intuitively, it seems obvious that climate affects the worldview. How do scholars study this connection?
Natalia Lamberova: I think that the influence comes through institutions. For example, if the climate and geography allow you to produce enough food without the need to attract a large number of people, if the temperature differences are small and you are more or less confident in a stable crop, then this will contribute to more individualism. Conversely, where uncertainty is great and the efforts of many people are required, institutions will be aimed at expanding coordination, social norms related to altruism will arise, aimed at creating a collective safety cushion.
Oleg Demidov: Of course, climate, geography, and ecology affect the economy directly and indirectly through culture and institutions. We can observe this even when communicating with people from different countries: in northern countries people are more closed, southerners are more relaxed and friendly.
Q: Recently, IMF experts released a paper in which they showed that in order to keep the temperature rise within 1.5-2 degrees and achieve carbon neutrality by the middle of the century, it is necessary to reduce emissions of carbon dioxide and other greenhouse gases by 25-50% by 2030 compared to 2019. However, the official commitments of the countries suggest a reduction of only 11%. How much can geopolitics and fragmentation complicate this undoubtedly common fight against global warming and environmental challenges?
Natalia Lamberova: That's a good question. As you said, coordination is needed, and what is happening in the world now hardly contributes to this coordination. There were problems with it even in more peaceful times. As we said, the climate affects different countries very differently. If a country does not feel that its climate is changing so much, and it is required to limit emissions very much, then it has a question: "Why should we pay for the rest of the countries?" Richer countries that have the resources to adapt can also ask: "Why should we pay for the rest of the countries by reducing economic activity, when we can solve problems ourselves by adapting to changes?" There is a group of poor countries that say: "Sorry, but we need to develop, we need cheap energy. You, who are rich now, got cheap energy during the Industrial Revolution, developed a wealthy society, and now you're telling us that we can't do that." So, there is a small group of countries that can afford investments in green technologies, can reduce emissions without reducing economic activity. And there are countries that cannot afford such substitution. And the problem of the stowaway arises when some countries expect others to pay for solving environmental problems.
There is also another question: let's say there is a common agreement, but who will ensure its implementation? How to punish a country that violates the agreements? Sanctions? But the problem of a stowaway arises even in this case, because some countries, for example, will limit to their detriment trade with a country that violates climate agreements, while others will not want to do that because it will cost them too much.
Q: There are instruments like the European carbon regulation, which stimulate and force companies to become green.
Natalia Lamberova: Yes, but increasing existing taxes or introducing new ones is a politically difficult thing, and the current carbon tax is too low to have a serious impact on reducing emissions. William Nordhaus, the Nobel Prize winner and author of the most famous models on the impact of climate on the economy, wrote that, in his opinion, the carbon tax has not come close to the optimal level. He believes that the domestic policy of subsidizing green investments works just as effectively as taxes. At the same time, it is much easier to implement politically.
Q: Oleg, what can you say about European regulation?
Oleg Demidov: Europe is certainly a leader in terms of tools for moving towards climate goals. And countries that want to trade with Europe will have to take this into account. In addition to the carbon tax, there are other types of regulation: for example, new legislation is now being introduced to restrict the import of seven products, such as beef and palm oils, if their production is associated with deforestation. This concerns imports worth about 75 million euros. I see how different market players are making quite serious efforts to change their supply chains in connection with this regulation, trying to motivate manufacturers to implement ESG practices.
Starting 2023, all European companies employing more than 250 people will be required to report on their carbon footprint, regardless of the type of business. Of course, these are additional costs. But companies that show themselves to be pioneers in this movement can count on better treatment from consumers, investors, and will be able to increase their market share.
Investors play a big role. 40% of the drop outs from the portfolios of large investors are related to companies’ impact on the environment and climate. I've studied the statistics on the venture capital market. 2023 was a very bad year, the market fell by about 50%. But the segment of climate technologies has declined less, by about 40%. Total investments in the climate sector in the first three quarters of the year amounted to about 9 billion euros. The figure does not seem very large, but, according to many experts, about 40% of future unicorns, companies with a billion-dollar valuation, will be from the climate sector.
There are a lot of examples of great technologies – from cars and airplanes that drive and fly on hydrogen, to installations for direct extraction of carbon dioxide from the atmosphere and turning it into something useful. One example is the Swiss greenhouse gas extraction company Climeworks, which raised $650 million in the latest round. In total, the company has already raised more than $800 million.
This is a very interesting sector, since, most likely, not all countries will be able to achieve zero carbon footprint by 2050. And technologies for the direct extraction of carbon dioxide from the atmosphere will be key: we will have to install a lot of systems that will compensate for the negative impact of emissions. This is one of the hot topics on the market. Elon Musk promised a prize to the company that can make this technology scalable, and now about 100 companies are competing for this prize.
Q: Let's talk about Russia. Over the past 40 years, global warming in Russia has been happening faster than the global average. Nevertheless, the newly approved climate doctrine contains a not too ambitious goal of achieving carbon neutrality by 2060. Russia, according to the Minister of Economic Development Maxim Reshetnikov, has chosen a soft path of carbon regulation that is as comfortable as possible for doing business. And in general, if you look at past policies, economic growth has always been more important than the environment. What do you think about Russia's carbon neutrality policy?
Oleg Demidov: There is not much I could add to Maxim Reshetnikov's words. Each country chooses its own approach, taking into account economic and social considerations and constraints. China also has a goal to achieve carbon neutrality by 2060. Yes, this does not fit into the Paris Agreement. But Russia is not the only country that aims to achieve carbon neutrality beyond 2050.
