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, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News
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The unequal effects of climate change on the global economy – private investors

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, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

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, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

According to the World Meteorological Organization, the past six years (2015-2020) have been the warmest on record, with the global average temperature rising 1.2 ° C above pre-industrial levels.

While climate change will affect all regions of the world, global warming and precipitation rates will not be evenly distributed. There will be winners and losers.

The Intergovernmental Panel on Climate Change (IPCC) has examined the risks of climate change in more detail. For this purpose, the generated greenhouse gases were modeled and various scenarios of climate change – so-called Representative Concentration Pathways (RCPs) – generated. Each scenario corresponds to a different degree of warming.

Are the economies overheating?

RCP2.6 is a “best case” scenario. In this scenario, greenhouse gas emissions are successfully reduced so that global warming is limited to around 1.5 to 2 ° C above the pre-industrial average. At the other end of the scale is RCP8.5. That is the “worst case” scenario. It reflects the “business as usual”, in which no efforts are made to reduce emissions. The scenario assumes a rise in global temperatures of 4 ° C compared to the pre-industrial average by 2100.

The IPCC points out that, as shown in Figure 1, all countries are likely to have higher temperatures by the end of the century, but global warming will be more pronounced in some regions of the world. Therefore, the economic impacts of climate change will also be different, which has important implications for asset returns.

Figure 1: Change in average surface temperature and average precipitation
(1986-2005 to 2081-2100)

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

Source: IPCC, 2014: Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.

The Arctic in particular is expected to continue to warm faster than the global average. In addition, temperatures in the higher latitudes of the northern hemisphere will rise faster than in the tropical regions.

Precipitation will also not be evenly distributed across the globe. It is expected to increase at high latitudes and in the equatorial Pacific – regions already affected by long monsoons. In contrast, precipitation in subtropical regions of the mid-latitudes, which are often arid regions, will in all probability decrease.

This means that as climate change increases, the world’s wetlands are likely to become more humid, while water is likely to become even scarcer in areas where water supply is already an issue. For example, India, Pakistan and Nepal are likely to experience stronger monsoons, while African and South American countries are likely to get drier.

The effects of climate change on productivity

We have incorporated the economic consequences of climate change into our long-term productivity forecasts. The methodology and implications for investors are set out in our 30-year return forecasts.

Recent research by Burke and Tanutama shows that there is a quadratic relationship between productivity growth and temperature. This means that productivity in “cold countries” increases with increasing annual temperatures, but begins to decrease at annual temperatures above 12–13 ° C.

In cold countries, for example, a rise in temperature could open up new cultivation areas or the melting of the ice could make other parts of the sea navigable and fishable. In hot countries, however, a decline in agricultural production is expected due to increasing desertification. Cattle breeding will also decline due to the increased heat stress.

Figure 2 shows the physical costs in a scenario in which global temperature increases by more than 3 ° C from the pre-industrial average by 2100. This scenario assumes that the global economies fail to implement adequate strategies to reduce CO2-Emissions to implement.

The costs are expressed relative to the “no climate change” scenario, in which the temperature rise has no impact. Over a period of 30 years, Switzerland, Canada, Germany, France and the UK will do better in a scenario in which global warming increases more than 3 ° C above pre-industrial levels. Productivity is falling in Australia and most of the emerging economies.

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

The more visible consequences of climate change

Climate change will not only cause economic damage in the long term. Extreme weather events make it clear that there are also short-term consequences. Hurricanes Harvey, Irma, Katrina and Sandy have already shown the damage climate change is already causing today. These are some of the most obvious examples of the short-term effects of global warming.

It is well known that global warming has led to a significant increase in weather-related events over the past few decades. Worldwide, for example, the average tropical cyclone has increased from 14 to 23 per decade since the early 1980s. In contrast, the number of floods has almost doubled. The IPCC highlights that the risks associated with extreme events continue to increase, with these events becoming more frequent and severe as temperatures rise.

Extreme weather events, as they are dependent on changes in temperature and precipitation, have different effects on different regions of the world. Floods and tropical cyclones have only increased in some areas of the world over the past few decades. Figure 3 below shows the change in the average number of these events in the first decade of 2000 compared to the 1980s. It shows that floods and tropical cyclones have become more frequent in Southeast Asia, which is also in line with the results of the IPCC analysis.

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

These events can have devastating consequences for people. Data from the Observatory for Internal Displacement shows that nearly 200 million people have been forced to leave their homes since 2008. In almost 98% of the cases, floods and storms were responsible for this.

More importantly, the data shows that some regions of the world are more affected than others. The residents of the Philippines in particular are at risk: the number of new displacements since 2008 accounts for 46% of the population. The rest of Southeast Asia and China are also affected by extreme weather conditions, but so are the USA and Japan. People living in European countries and the UK are the least likely to be affected by displacement due to extreme weather conditions.

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

Finally, it should be emphasized that the data relate to displacement within the country, but we assume that internal migration has a positive correlation with foreign migration. This could indicate that as global warming and harsher weather extremes increase, more people are migrating from risk areas like Asian countries to safer regions.

What does that cost investors?

Research is debating whether natural disasters can boost productivity and growth in the long term. This hypothesis is based on the fact that companies that survive the disaster increase their capital and adopt new technologies. The hypothesis that disaster leads to growth is known as “creative destruction”.

However, not all data support this assumption. A recent study [1] analyzed the physical consequences of tropical cyclones from 1950 to 2008. Their data shows that national income is falling compared to its pre-disaster trend and does not recover within 20 years. This could be explained by the fact that disasters temporarily hold back growth by destroying capital; recovery does not occur because the various strategies used to stimulate the economy do not offset the negative short-term consequences of the loss of capital.

The analysis seems to support the “no recovery” hypothesis. It finds that a one-year standard deviation in exposure to cyclones lowers GDP by 3.6 percentage points 20 years later. The country is thus set back in its development by almost two years.

In our analysis of 30 year returns, we considered the impact of global warming on productivity to see if it will affect long-term stock returns. Productivity is a major catalyst for stock return over the long term. Hence, stock returns are affected by the impact of climate change on productivity.

Figure 6 compares our 30-year stock returns with and without global warming. What is clear is that there will be winners and losers due to rising temperatures.

, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

Canadian, UK and European stocks in particular will generate higher returns compared to the no climate change scenario. Climate change is bad news for equity investors in emerging markets, with particularly pressure on India, Brazil, Mexico and South Africa.

[1] The Causal Effect of Environmental Catastrophe on Long-Run Economic Growth. Hsiang, Solomon M. and Jina Amir S., 2013. NBER Working Paper.

The views and opinions expressed herein are from the authors and do not necessarily represent those expressed or listed in other communications, strategies, or funds from Schroders or other market participants. These are subject to change.

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, The unequal effects of climate change on the global economy – private investors, Forex-News, Forex-News

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