After writing yesterday’s post, I was going through Solomon Hsiang’s blog and found a post pointing to three studies from researchers at business schools:
Severe Weather and Automobile Assembly Productivity
Gérard P. Cachon, Santiago Gallino and Marcelo Olivares
Abstract: It is expected that climate change could lead to an increased frequency of severe weather. In turn, severe weather intuitively should hamper the productivity of work that occurs outside. But what is the effect of rain, snow, fog, heat and wind on work that occurs indoors, such as the production of automobiles? Using weekly production data from 64 automobile plants in the United States over a ten-year period, we find that adverse weather conditions lead to a significant reduction in production. For example, one additional day of high wind advisory by the National Weather Service (i.e., maximum winds generally in excess of 44 miles per hour) reduces production by 26%, which is comparable in order of magnitude to the estimated productivity drop during the launch of a new vehicle. Furthermore, the location with the best weather (Arlington, Texas) only loses 2% of production per year due to the weather, whereas the location with the most adverse weather (Lordstown, OH) suffers an annual production loss of 11%. Our findings are useful both for assessing the potential aggregate productivity shock associated with inclement weather as well as guiding managers on where to locate a new production facility – in addition to the traditional factors considered in plant location (e.g., labor costs, local regulations, proximity to customers, access to suppliers), we add the prevalence of bad weather.
Welfare Costs of Long-Run Temperature Shifts
Ravi Bansal, Marcelo OchoaAbstract: This article makes a contribution towards understanding the impact of temperature fluctuations on the economy and financial markets. We present a long-run risks model with temperature related natural disasters. The model simultaneously matches observed temperature and consumption growth dynamics, and key features of financial markets data. We use this model to evaluate the role of temperature in determining asset prices, and to compute utility-based welfare costs as well as dollar costs of insuring against temperature fluctuations. We find that the temperature related utility-costs are about 0.78% of consumption, and the total dollar costs of completely insuring against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered natural disasters to impact growth, insuring against temperature variation raise to 5.47% of world GDP. We show that the same features, long-run risks and recursive-preferences, that account for the risk-free rate and the equity premium puzzles also imply that temperature-related economic costs are important. Our model implies that a rise in global temperature lowers equity valuations and raises risk premiums.
Temperature, Aggregate Risk, and Expected Returns
Ravi Bansal, Marcelo OchoaAbstract: In this paper we show that temperature is an aggregate risk factor that adversely affects economic growth. Our argument is based on evidence from global capital markets which shows that the covariance between country equity returns and temperature (i.e., temperature betas) contains sharp information about the cross-country risk premium; countries closer to the Equator carry a positive temperature risk premium which decreases as one moves farther away from the Equator. The differences in temperature betas mirror exposures to aggregate growth rate risk, which we show is negatively impacted by temperature shocks. That is, portfolios with larger exposure to risk from aggregate growth also have larger temperature betas; hence, a larger risk premium. We further show that increases in global temperature have a negative impact on economic growth in countries closer to the Equator, while its impact is negligible in countries at high latitudes. Consistent with this evidence, we show that there is a parallel between a country’s distance to the Equator and the economy’s dependence on climate sensitive sectors; in countries closer to the Equator industries with a high exposure to temperature are more prevalent. We provide a Long-Run Risks based model that quantitatively accounts for cross-sectional differences in temperature betas, its link to expected returns, and the connection between aggregate growth and temperature risks.
Weather and climate events are no joke, even from a purely perspective of business productivity.
What if the projected higher crop yields lead to lower food costs and happier workers who become more productive? Will their be an increase in warm-weather vacations? Will there be increased sun, thus vitamin D levels? Won’t companies that provide weatherproofing services be boosted? Will this encourage businesses to allow more working from home and encourage more automation? How much will sectors of the economy which benefit (e.g. arctic shipping) be boosted relative to sectors that will be hurt?
Just brainstorming what the benefits and responses might be. I’m not trying to say warming is good or that we should not find ways to mitigate its effects. Claiming these kinds of potential economic issues as a reason to mitigate warming, on its own, is unconvincing to me.
Ely:
From what I’ve read, the best estimate is that crop yields will be lower, not higher, under global warming. See the work of Wolfram Schlenker. So I don’t see it yielding lower food costs or happier workers.
I’ll happily concede that; my statement was just brainstorming off cursory info I had read. My bigger point is to express David Deutsch’s position on sustainability, as I describe in a blog post here: (hoping the URL posts correctly), with a long passage of Deutsch’s at the end.
http://suitdummy.blogspot.com/2012/08/the-semblance-of-sustainability.html
See USGCRP on impacts in the U
Oops, slip of the finger.
That was impacts in the US.
There is no such thing as “higher improved yields” as a function of global warming.
Warming has different effects differ places. It may help some of Southern Alberta, Manitoba, Saskatchewan,but it will also greatly diminish the maple sugar business in New England, and some fruit trees won’t grow where they do now.
The biggest issue is water: some places are in for serious drought, and then the temperatures and CO2 levels are irrelevant. Likewise, big floods from the sped-up hydrological cycle won’t help some places. In well-developed places, yield improvements have been slowing down … but those numbers can fool you. Total production can go down while yield goes up, if drought/floods wipe out acreage that has lower than average yield.
Central CA grows half the fruit and vegetables for the US, and people are expecting serious impacts from water and temperature issues. Of course, from a pure-numbers economics view, US GDP % of agriculture is ~1%, so we could just zero that out as not a big deal.
Warm weather vacations may move. I’ve seen papers extolling the virtues of warmth, noting that Central Canada will be more attractive, although Disneyland/Disneyworld may be too hot for comfort more often. So, there are plusses and minuses.
No one is expecting big changes in solar insolation, so no more Vitamin D unless one spends more time in the sun.
People do study these things in great detail, not just brainstorm them.
Summary: mitigate, {adapt, or suffer}, with multi-decadal lag time, and some adaptation and suffering requirements already committed.
For instance, it’s very hard to see how New Orleans will exist in 2100 in anything like its current form. With BAU, the best estimates (and they vary by region) are ~1m sea level rise by 2100, although some are planning for 1.5m. I wouldn’t want to guess by 2200. That may matter or not, although in some areas it will be the end of beach holidays.
Fortunately, people can leave pictures like these for their great-grandchildren to see, since most of them will be gone.
My only point is that it’s nuanced and studies can only narrow in on some sectors or others, making them poor for generalizing about the overall impact economically. Should I weight the negative impact to New England maple sugar production equally versus some windfall in yield elsewhere? That’s more complicated. I’m mostly just saying these arguments are very unconvincing. There are other, far better arguments about costs to climate change. I would need a comprehensive model that accounts for windfalls in some sectors, no changes in some, and bad changes in others, and synthesizes it down to likely overall effects on aggregate production, jobs, competitiveness, etc. Just telling me that some unfortunately located plants will take a production hit doesn’t tell me much, and certainly doesn’t lend credibility, one way or another, to any particular stance on climate change.
Can I assume you are familiar with IPCC AR4 WG II, 976 pp.? Although the USGCRP report is newer, and intended for the general public it is just US, whereas the IPCC covers the world, with numerous references to the literature. That’s a little old.
AR5 will be done 2013/2014 and for extreme events, there’s a recent report.
I poked around chapter 7 of the first link you posted and it seems to agree with my point:
“Costs or benefits of climate change-related impacts on industry, settlements and society are difficult to estimate. Reasons include the facts that effects to date that are clearly attributable to climate change are limited, most of the relatively small number of estimates of macroeconomic costs of climate change refer to total economies rather than to the more specific subject matter of this chapter, and generalising from scattered cases that are not necessarily representative of the global portfolio of situations is risky. Historical experience is of limited value when the potentially impacted systems are themselves changing (e.g., with global economic restructuring and development, and technological change), and many types of costs – especially to society – are poorly captured by monetary metrics. In many cases, the only current guides to projecting possible costs of climate change are costs associated with recent extreme weather events of types projected to increase in intensity and/or frequency, although this is only one kind of possible impact and cannot be assumed to be representative of aggregate costs and benefits of all aspects of climate change, including more gradual change.
Estimates of aggregate macroeconomic costs of climate change at a global scale (e.g., Smith et al., 2001) are not directly useful for this chapter, other than generally illustrating that because many locations, industrial sectors and settlements are not highly vulnerable, total monetary impacts at that scale might not be large in proportion to the global economy. As Section 7.4 indicates, however, vulnerabilities of or opportunities for particular localities and/or sectors and/or societies could be considerable. A possible example is climate-related contributions to changes already being experienced by societies and settlements in the Arctic, which include destabilised buildings, roads, airports and industrial facilities and other effects of permafrost conditions, requiring substantial rebuilding, maintenance and investments (ACIA, 2004). An impact assessment in the UK projected that annual weather-related damages to land uses and properties could increase by 3 to 9 times by the 2080s (Harman et al., 2005). More generally, as one specific aspect of vulnerabilities to climate change, possible economic costs of sea-level rise have been estimated, since exposures of coastal areas to a specified scenario can be analysed for costs of the change v. costs of protecting against the change; and effects of direct costs in coastal areas can be projected for other parts of a regional or national economy (Nicholls and Tol, 2006; Tol et al., 2006). Generally, these studies conclude that the costs of full protection are greater than the costs of losing land to sea-level rise, although they do not estimate non-monetary costs of social and cultural effects.”
My only point is that it’s nuanced
Unfortunately it is not. http://www.washingtonpost.com/opinions/climate-change-is-here–and-worse-than-we-thought/2012/08/03/6ae604c2-dd90-11e1-8e43-4a3c4375504a_story.html
Climate change is having severe effects in many places and in many ways. The US drought, the Russian drought, and flooding such as in Queensland and southern Russia are almost certainly partly a factor of global warming.
I’m from Ontario Canada and we lost ~90% of our apple crop this year due to an abnormally warm spring, i.e. new record). A relatively small economic loss but a lot of food gone. How much did the loss of most of the US corn crop cost?
Kudzu (a warm weather plant) has been sighted in South Western Ontario –potentially a massive danger to local agriculture both as an invasive species and as a carrier of some type of organism which can attack bean crops.
Corn polinates within a fairly narrow temperature range as does rice. Raise mean summer temperatures only a couple of degrees and we could lose a massive amount of the world’s food stocks in a single year.
This is not just an economic($$) cost but means faminees, deaths, social upheaval and wars.
+ 1 to Ely’s comment. Also, a lot of this seems predicated on the assumption that extreme weather is in fact increasing as temperature rises.
I’d be interested in your opinions on the literature showing that extreme weather events are not in fact increasing, that deaths from weather are decreasing, and that deaths from cold are actually more a factor than deaths from heat. There’s a lot of statistical methods being applied and you might be able to shed some light on whether it’s being done right.
Tropical cyclones not increasing
http://www.agu.org/cgi-bin/highlights/highlights.cgi?action=show&doi=10.1029/2011GL047711&jc=gl
Floods not increasing
http://itia.ntua.gr/en/docinfo/1128/
Precipitation not increasing
http://www.agu.org/pubs/crossref/2006/2005GL025393.shtml
Multiple parameters not increasing
http://www.sciencedirect.com/science/article/pii/S1364682611000319
Deaths from cold more important
http://emlab.berkeley.edu/~moretti/weather_mortality
Deaths from extreme weather declining
http://reason.org/news/show/decline-deaths-extreme-weather
http://www.munichre.com/en/group/focus/climate_change/default.aspx
Of course it may just be alarmism in a small reinsurance company.
Cachon et al. estimates are huge but presumably they reflect an upper bound of sorts because if they became more frequent there would be investment to avoid and protect against weather disruptions.
It is well known that equity betas are not stable (e.g. http://econpapers.repec.org/article/cupjfinqa/v_3a20_3ay_3a1985_3ai_3a01_3ap_3a73-94_5f01.htm), and so I’m skeptical of using betas as economic objects rather than just approximations without causal interpretation.
I thought it was interesting that the Welfare Costs of Long-Run Temperature Shifts paper gets 1/10 as large welfare costs with CRRA utility. Since Epstein Zinn (their formation) does poorly in panel data (see Flavin and Nakagawa), I see no reason to think that those welfare estimates are particularly useful either.