Climate change and economic growth in Asia-Pacific. Prepared for Regional Dialogue on Climate Resilient Growth and Development February 2018

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1 Climate change and economic growth in Asia-Pacific Prepared for Regional Dialogue on Climate Resilient Growth and Development February 2018

2 Understanding climate change impacts is crucial to developing effective climate finance strategies and mainstreaming 2 allows policymakers understand how much focus and resources are needed to combat climate change helps with identifying where in the economy attention should be focused provides an important input to understanding the impact of climate finance flows

3 Frequent natural disasters and forecast temperature changes suggest cataclysmic climate change impacts Recent South Asia flooding and IPCC regional temperature and rainfall projections both support this view 3 Agartala, Tripura State, 2017 IPCC AR5 regional climate projections

4 There is a disconnect between this narrative and the relatively small damage estimates from many climate-economic models Damages for South Asia are higher than global estimates, but still smaller than might be expected 4 Global climate change damages from common modelling approaches Stern Review (2007): 5.3% % costs in 2200 Tol (2014): IPCC (2014): 0% - 4.8% costs for a 2.5 to 3 C increase 0.2% - 2% costs for a 2 C increase OECD (2015): 1% - 3% costs in 2060 South Asia climate change damages from common modelling approaches India Bangladesh Nepal Other Asia annual damages as a proportion of GDP in 2050 (%)

5 GHG emissions Impacts / Costs Low damage estimates may reflect modelling challenges, or higher than expected economic resilience to climate change 5 Models include a range of uncertainties, and often assume high resilience or ability to cope in economies estimates vary due to a range of uncertainties and differences in approach uncertainties and limited data inputs at several levels may lead to underestimated impacts Economic activity Emissions levels Emissions to temp sensitivity Temp to damages relationship Modelling techniques additionally, some approaches model the whole economy and allow for changes that reduce the impacts of climate change for example, workers and investments may move away from high impact sectors (for example, agriculture) and towards low impact sectors (for example, services)

6 However, these economic models may also only show part of the picture The streetlight effect suggests we may only be looking at what is (relatively) easy, not what is fully accurate 6

7 Traditional climate impact models determine damages and growth separately Output is determined first, then damages are based on a damage multiplier based on annual temperatures 7 Production function Output = Damage multiplier x Technology Capital Labour Climate impacts climate impacts only affect today s output

8 But, new research is beginning to look at how climate change may affect the underlying drivers of growth Under this approach, climate change affects future production, not just output in the year they are felt 8 Production function Growth = Technological improvement Capital investment Demographic change e.g. technology no longer suits climate e.g. reduced investment e.g. morbidity, death climate impacts affect future output by reducing growth potential Climate impacts

9 Climate change impacts on growth may lead to significantly greater damages than impacts on output Damages to growth would put economies on substantively different pathways Baseline: GDP growth 3% 9 Output reduced by 2% each year Growth reduced by 2% each year 0 3% growth GDP level reduced by 2% GDP growth reduced by 2%

10 Recent approaches accounting for climate impacts on growth suggests significantly higher damages Approaches incorporating growth effects suggest damages could be 10x higher but are controversial 10 traditional approaches 0 to 5 percent of GDP by mid- to latecentury 2 to 4 percent of GDP by 2050 including growth impacts* 23 percent reduction in GDP per capita by 2100 ~75 percent reduction in GDP per capita by 2100 however, there is debate about whether recent very high damage estimates are accurate * Source: Burke, Hsiang & Miguel 2015

11 Taking climate impacts on drivers growth into account could have important ramifications for climate action and budgeting Taking growth impacts into account increases the importance of action, and suggests potential focus areas 11 climate impacts on drivers of growth suggest an even greater need for climate action effective climate change budgeting and financing frameworks that reflect the full extent of potential damages will be even more important understanding the ways in which climate impacts different drivers of growth will also help to direct effective approaches to increase resilience to climate change measures to safeguard against long-term growth impacts are likely to provide better returns than measures protecting against short-term damages to output

12 This suggests future research to examine the relationship between climate impacts and growth in South Asia since 1970 Using GDP, temperature and precipitation data from over 30 years at the national and state levels 12 Production function Growth = Technological improvement Capital investment Demographic change helps us understand the size of the overall growth impact Climate impacts

13 This research will also examine the size and importance of links between climate impacts and individual drivers of growth To enable comparison of different channels and support resilience to climate impacts on growth 13 Production function Growth = Technological improvement Capital investment Demographic change helps us understand what drives climate impacts on growth Climate impacts

14 14 Key messages Climate change impacts on drivers of growth are likely to be important, but are still not well understood 1. estimates of climate change damages from economic models are limited by what is and is not included in the models 2. crucially, models typically only look at contemporaneous impacts on output, and exclude climate change impacts on economic growth 3. new approaches that take account of growth impacts suggest significantly higher projected damages, especially in South Asian countries but are controversial 4. this has important implications for responses to climate change including climate change budgeting and mainstreaming 5. more research can help us better understand the scale of the impacts in South Asia, and the relative importance of different impact channels to help governments and others make better plans for climate impacts, and think about how they can address or reduce these impacts

15 Contact us: Ely Place London EC1N 6TD United Kingdom Author contact details: John Ward & Nick Kingsmill T: +44 (0) E: Company Profile Vivid Economics is a leading strategic economics consultancy with global reach. We strive to create lasting value for our clients, both in government and the private sector, and for society at large. We are a premier consultant in the policy-commerce interface and resource and environment-intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world. The success we bring to our clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations. Practice areas Energy & Industry Natural Resources Public & Private Finance Earth Observation Growth & Development Carbon Pricing Cities & Infrastructure