The most salient manifestations of global warming are heat or water based. Heat and drought caused by increasingly long dry seasons can prompt wildfires and agricultural destruction in addition to stressing other resources. Currently, “winter temperatures across the Great Plains and Midwest are now some 7º warmer than historical norms. In the Northwest, the spring snow pack has already declined 25 percent over the past 40 to 70 years. It will likely shrink another 40 percent by the 2040s 1.” Hotter and longer dry seasons have consequent destructive impacts on shipping, infrastructure, and local ecosystems. California and the Southwest are currently predicted to see drier summers. In California, the 2018 wildfire season has been the most destructive on record with a total of “7,579 fires burning an area of 1,667,855 acres2.” Water based events associated with conditions of high precipitation, like an increasingly devastating hurricane season, can contribute to the destruction of capital in addition to a plethora of other economic costs. “From 1980-2018, tropical cyclones have caused the most damage, have the highest average event cost, and are responsible for more deaths than any other billion-dollar weather and climate disaster type in the US. In a warmer climate, hurricane precipitation is projected to increase by about 20% near the eye of the storm and the average storm intensity is expected to increase 2-11%3”
Both heat and water based warming events can cause structural shifts in the macroeconomy via changes in unemployment and trade. Both classes of events can cause labor market disruptions with outcomes largely negative. A productivity shock, such as a hurricane, will shift the production function downward so that the marginal product of labor is lower at every level of employment, resulting in a lower amount of desired labor given wage rigidities. As firms cannot afford the same quantity of labor given their lower productivity, unemployment will rise. In addition, events such as mass evacuations and relocation of large populations due to rising sea levels or fires will restrict labor supply – if firms haven’t already shut down temporarily. In this case, the reallocation of resource will cause frictional unemployment in addition to the structural shift. In an affected area, production in the long term may cease as well lowering output and incurring costs of relocation firms. There are several benefits of global warming on employment, albeit minimal, as wages in fire or hurricane struck counties can often increase during to the issuing of suppression effort contracts. As this applies to relatively few counties, structural changes in employment on a macroeconomic level would outweigh these few short-term benefits. Local wages may also rise as firms try and retain labor, given the efficiency wage theory, by preventing possible turnover. A shift in production or jobs in certain sectors affected by warming events will incur structural unemployment.
Trade structure in the United States will also be affected by global warming. As capital is destroyed due to heat or water events, output per worker declines as well firm profitability. With asset deterioration firms will have less liquidity and higher rates of default, and the reduced attractiveness of investment will scare foreign and domestic investors. Seeking greater profitability and stability in other countries, who are not affected by global warming in this analysis, more dollars will be supplied on the foreign exchange market driving the exchange rate down. In addition, foreigners will demand less US assets and dollars contributing to a decrease in the exchange rate. As a result the US dollar will have less purchasing power relative to other countries. Foreign goods will increase in real cost resulting in a decline in imports and an increase in exports as foreigners purchase greater quantities on now cheaper American goods. In this case, the new equilibrium would lean towards a current account surplus. However, as the current US current account balance reflects a strong reliance on cheap foreign inputs, like Chinese made electronic components, the current account balance would likely remain negative. A weakening exchange rate will increase the real cost of foreign imports, raising input prices on American firms due to relatively a lack of cheap domestic alternatives and hurting profits.
Frequent supply shocks will increase economic volatility as the frequency and deviation of output to full employment output increases. In addition, warming events such as hurricanes or large wildfires lead to instability in local labor markets as they amplify variations in employment as well as output. The ISLM model can be applied to view the deviation of y and y bar due to a negative supply shock that lowers the MPN. In this case, the supply shock reduces full employment output shifting the FE line left. As a result, prices increase shifting the LM curve right until a new equilibrium is found with lower output and higher prices. These warming events increase the risk of stagflation, especially among less developed countries; Take for example, the severe stagflationary recessions following Hurricane Mitch in Honduras and Nicaragua. In Honduras, “sixty percent of crops were destroyed, including the entire banana harvest, leaving thousands without work and the country without its most important export crop. A quarter of the educational infrastructure was destroyed, forcing the cancellation of the rest4.” Honduras and Nicaragua provide clear examples of increased economic volatility as a result of seasonal warming events.
Macroeconomic volatility can be a major obstacle to growth. “According to estimates produced by Hnatkovska and Loayza (2005), based on a sample of 79 countries, increasing the average value of volatility by the value of its standard deviation results in an average loss of 1.3 points for growth in GDP over the period 1960-2000, and 2.2 points for the decade 1990-2000. Volatility can, indeed, act as an obstacle to the key factors in economic development 4.” In the long run, increased volatility reduces consumption, investment, and productivity. A resulting lack of predictability in economic conditions and policy can also harm consumer and investor confidence as expected future wealth decreases. Here, the Solow growth model can be used to analyze the destruction of capital stock due to global warming, and its subsequent effects. Usually capital shocks such as war present opportunities for new investment. In the current post shock period, investment per worker is greater than required to keep capital per worker constant, and capital investment increases back to the golden ratio. However, as these shocks result from consistent patterns of degradation, which are have been shown to increase in magnitude, these capital shocks are consistent – unlike other “black swan” exogenous shocks.
By reducing saving per worker, a negative productivity shock causes the long run capital labor ratio to fall , having a negative impact on the long term standard of living. Welfare, as defined as the difference between output per worker and investment per per worker, is also reduced. The economic costs of global warming also manifests in an increased need for government intervention. Widespread displacement in employment and need for federal relief aid, for example, will require an increased in government spending. The increase in government spending will shift desired national savings leftwards increasing the real interest rate, resulting in a rightward shift of the IS curve. By shifting the IS curve to the right , short term output will increase until prices adjust upwards in the long term.
https://www.scientificamerican.com/article/global-warming-obama-report/
https://www.humanityroad.org/situation-reports/usa/woolsey-fire-and-camp-fire-2018
https://www.ncdc.noaa.gov/billions/
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2759213/
http://www.prasad.dyson.cornell.edu/doc/book_chapters/GrowthAndVolatilityInAnEraOfGlobalization.pdf