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Economy: European scale

Global Impacts

Within the next 26 years, climate change will reduce global income by about 19% relative to a fictional world without global warming. By 2050, this equates to a global income loss due to climate change of $38 trillion per year. This loss is the combined impact of climate change on various aspects that are relevant for economic growth such as agricultural yields, labour productivity and infrastructure. This huge economic impact will result from the greenhouse gas emissions that have already been pumped into the atmosphere so far. Future emissions will make things worse. Under a business-as-usual scenario, average global income losses due to climate change may exceed 60% by 2100. On the other hand, if emissions fall to net zero by 2050, income declines will stabilise at about 20%. These are the outcomes of a new study by researchers at Germany’s Potsdam Institute for Climate Impact Research, reported in the scientific journal Nature. The study is based on empirical data on actual climate-related impacts on economic growth in more than 1,600 subnational regions around the world over the past 40 years. These data have been combined with projections of the impacts of changes in temperature and rainfall patterns through to 2050 (14).

These estimates are much higher than previous estimates in scientific studies. According to the authors of this study, this is because their study is more sophisticated. Previous studies are mostly based on damages related to rising temperatures at a national level only. This new study also included the impacts of rainfall and extreme weather over the last 40 years in 1,600 subnational regions, thus better representing the local variability of the impact of weather extremes (14).

The results are consistent with previous studies in disproportionately severe impacts on countries least responsible for climate disruption, further exacerbating inequality. In the United States and Europe, average income decline is estimated at about 11%, compared with 22% in Africa and south Asia. The countries that will suffer the most from the damages between now and 2050 are those that are least responsible for climate change. They also have the least resources to adapt to it. Income losses are projected for all regions except those at very high latitudes, at which reductions in temperature variability actually bring benefits (14).

These results are downright shocking, and yet they are a lower bound estimate. Not only with respect to the ongoing future emissions, but also because many major climate impacts have not yet been incorporated into the analysis, including heatwaves, sea level rise, tropical cyclones, tipping points, and damage to natural ecosystems and human health (14).

Just like many studies have shown before, this study illustrates the economic benefits of mitigating global warming and achieving the Paris Climate Agreement. The damages of climate change from greenhouse gas emissions in the past already outweigh the mitigation costs. By 2050, global income loss due to climate change is estimated to be $38 trillion per year. The costs of limiting global warming to 2 °C are estimated to be ‘only’ $6 trillion per year by 2050. However, a major impact of climate change on global economy can no longer be avoided. Stronger adaptation strategies are therefore needed, particularly in poorer, worst-affected countries, to cope with the changes up to 2050 that are already locked into the climate system, the authors conclude (14).

Previous studies reported much lower economic impacts. For instance, in 2014 the IPCC reported that globally aggregated economic impacts of global warming are a small fraction of income up until 3°C. A global mean average temperature rise of 2.5°C may lead to global aggregated economic losses between 0.2 and 2.0% of income and losses increase with greater warming, the IPCC reported (6).

Global loss of labor productivity due to heat exposure

Heat stress does not seem to affect productivity in Europe yet, but worldwide it is. Estimates in recent years have estimated a loss of approximately 200 billion labor hours per year in the agricultural and construction sectors worldwide (7). According to a review by The Lancet magazine, we would have lost 45 billion potential labor hours worldwide between the years 2000 and 2018 alone (8). 40% of the workforce would live in areas where it is occasionally too hot for heavy outdoor work. Recently, a publication appeared in which these numbers were significantly revised upwards (Parsons et al. (2022)). Worldwide, not 200 but 650 billion working hours would be lost due to extreme heat, in construction, agriculture, forestry and fishing. Not 40% but more than 70% of the working population would live in areas with occasionally too much heat stress for heavy outdoor work. The loss of working hours would correspond to almost 150 million jobs. As a result, heat stress would have a similar impact on productivity loss worldwide as the lockdowns during the COVID-19 pandemic. The researchers also put a price tag on this loss of 650 billion working hours: an annual loss in global labor productivity of 2100 billion US dollars (2017 price level), or 1.7% of the global Gross National Product. They also looked at the extent to which climate change is already having an impact on these numbers. They estimate that global warming has increased the loss of labor productivity by 9% over the past 20 years.

These numbers are a lot higher than the numbers reported in the past. The global costs associated with decreased labor productivity due to heat exposure have been estimated in two studies: $280 billion and $311 billion annually, for the situation in 1995 (9) and 2010 (10), respectively. These studies also projected considerably greater future costs: an increase by an approximate factor of eight between 2010 and 2030 (DARA, 2012) (9)

Much has been written about the possible consequences of increasing heat stress for productivity and thus the economy. If we manage to stay below the 2°C global warming target of the Paris Agreement, the loss of productivity from increased heat stress would be less than 0.5% of the global economy by 2100 (expressed in GNP of the world economy) (11). If we fail to reverse the current rate of warming, the productivity loss could amount to 2.6% - 4% of GDP for the world as a whole, scientists tell us. These last numbers are probably too pessimistic. They are based on an unrealistic business-as-usual scenario where we continue current greenhouse gas emissions. The global productivity loss has also been calculated for different levels of global warming: if the Earth were 1.5°C, 2°C, 3°C or 4°C warmer in 2090 than at the end of the 19th century, the associated heat stress will slow the global economy (GNP) by 0.48%, 0.68%, 1.2% and 1.7% in 2090, respectively (12). According to experts, the scenarios leading to global warming in 2100 between 2°C and 3°C are the most likely (13). That would mean that before the end of this century we are heading for a decline in productivity due to heat stress of about 1% of the world economy.

Impacts in European economies: future snapshots

For most economic sectors, the impact of climate change will be small relative to the impacts of other drivers. Changes in population, age, income, technology, relative prices, lifestyle, regulation, governance and many other aspects of socio-economic development will have an impact on the supply and demand of economic goods and services that is large relative to the impact of climate change (6).

The economic impacts of climate change have been estimated for a global mean temperature rise of +2°C and +4°C, respectively (1). This has been done for 85 sub-regions covering 27 European countries. Impact functions were attached to specific activities within sectors that will be directly impacted by climate change. The same impact function was used to represent impacts in all sub-regions of Europe.The resulting climatic changes for the different regions in Europe were based on the results of the PESETA study (2). Hence, the results are to be interpreted as snapshots of the European economies under different climate futures. A so-called general equilibrium model (GRACE) was used; general equilibrium models suppose in principle that adaptation happens instantly when resource constraints shift, technologies change or new information arrives.

+2°C increase

The results indicate that the European economies are moderately affected by a +2°C increase: the total GDP for the European region falls by 0.03% when compared with GDP without climate change. These results agree with results from the PESETA study for a +2.5°C increase in 2080 (3).

The strongest negative impacts are found in the two southern regions, where a +2°C increase implies per year reductions in GDP up to 0.1% in Spain and Portugal. The effects in these southern regions are mainly caused by a drier climate, which affects agriculture and forestry. Higher temperature also implies negative impacts to tourism. Moderate, and even positive, effects are projected for the Baltics and Central-Eastern European countries. The western regions and the north of Europe are, in general, negatively affected by the +2°C shift, and with relatively small variations (1).

+4°C increase

At a +4°C shift, all sub-regions lose in economic terms in this study, and the reduction in GDP are considered substantial, especially in the southern regions of Europe. As expected, the sectors based on utilization of natural resources, agriculture, forestry and fisheries, are the most affected. For Europe the estimated reduction of annual GDP in 2080 is 0.26% (1). These results are stronger (more negative) than the results from the PESETA study for a +3.9°C increase in 2080 (3).

Regions that face the most negative impacts in the +2°C shift are the most severely impacted in the +4°C shift, and those who gain in the +2°C shift are the least affected in the +4°C shift. GDP loss in the sub-regions of Europe varies from less than 0.1% in some sub-regions of the Baltic States and Central-Eastern European countries to between 0.6 and 0.7% in the sub-regions of Galicia and Andalucia in Spain (1).

Impact on natural resources: agriculture and forestry

The results for a +4°C shift indicate an increase of the value of agricultural land by 0.6% in the Baltics, by 0.2% on the British Islands and by 5.4% in the Nordic countries. In the other regions, the value of land declines, up to 4.4% in Spain and Portugal. A general reduction of agricultural prices leads to a reduction in the contribution to GDP from agriculture in all regions, although there is a positive change in certain sub-regions (1).

In relative terms, the value of forested land exhibits the most substantial effect among the natural resources of a +4°C shift. It increases in all regions except the Mediterranean countries, and most in the Baltics and the Nordic countries, by 14.9% and 16.4%, respectively. This reflects a combination of increased physical growth and value of forested land, making a slight increase in the supply of forest products. This results in a reduced price of output, and the overall effect on the contribution to GDP is moderate (1).

Adaptation strategies

In a recent study it has been assessed that about a quarter of the world’s productive capital could be sensitive to climate (4). The study suggests that in a “perfect” world aggregate adaptation costs could be low when adaptation is proactive and anticipates warming approximately twenty years ahead. Delaying adaptation may increase adaptation costs by a factor of ten when adaptation only starts after vulnerable sectors are impacted. Overinvestment in protection capital, on the other hand, would allow the economy to stay consistently well-adapted to climate and avoid transient maladaptation costs.

The theory of adaptation timing identifies two situations where it is advisable to bring adaptation forward (5):

  1. Early benefits: Fast-tracking adaptation makes sense if measures have immediate benefits that would be otherwise be forgone. Examples include: improvements in water efficiency; flood protection measures; measures to deal with heat stress.
  2. Costly lock-in: Fast-tracking adaptation is also desirable if acting today costs less, in present value terms, than acting tomorrow. The most obvious cases are: long-lived infrastructure investments such as ports, roads, water supply systems and flood protection schemes; the design of buildings; spatial planning.

References

The references below are cited in full in a separate map 'References'. Please click here if you are looking for the full references for Europe.

  1. Aaheim et al. (2012)
  2. Christensen et al. (2007), in: Aaheim et al. (2012)
  3. Ciscar et al. (2011b), in: Aaheim et al. (2012)
  4. Dumas and Ha-Duong (2012)
  5. Fankhauser and Soare (2012)
  6. IPCC (2014)
  7. DARA and Climate Vulnerable Forum (2012); Kjellstrom et al. (2019), in: Parsons et al. (2022)
  8. Watts et al. (2019)
  9. Kjellstrom et al. (2019), in: Borg et al. (2021)
  10. DARA (2012), in: Borg et al. (2021)
  11. Takakura et al. (2017); Borg et al. (2021)
  12. Takakura et al. (2018), in: Borg et al. (2021)
  13. Pielke et al. (2022)
  14. Kotz et al. (2024)

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