Module 3: Systemic Risks
The Macroeconomy
In general terms, macroeconomics measures the aggregate performance of a nation’s economy. It is made up of several related “markets” within a country: the goods and services market (which determines output and the price level/inflation), the labour market ((un-) employment and the wage rate), the money (bond) market (interest rates), and the foreign exchange market (trade balance and currency exchange rate). Often, when we wonder whether or not our national economy is doing well or poorly, we look to these macroeconomic markets for indicators.
The pervasive nature of climate risk means that every aspect of the macroeconomy is vulnerable. Recession, high unemployment, price volatility, declining productivity—these are all potential outcomes as climate risks materialize.
Supply-side shocks arising from climate-related hazards (like price volatility, damage to the capital stock, falling labour productivity) can increase the costs of economic output, creating inflationary pressures in affected areas of the economy. Demand-side shocks (e.g., through loss of personal wealth, or investment uncertainty) can create recessionary pressures.
The following video provides a basic overview of the potential macroeconomic consequences of climate change.
Video attribution: “Climate Change and the Macroeconomy” by Todd Thexton, Financial Impact of Climate Change, Adaptation Learning Network is licensed under CC BY 4.0.
If you are interested in seeing some estimates of climate-related GDP forecasts produced by macroeconomic models, have a look at this article: Kompas, T., Pham, V.H., Che, T.N. (2018). The effects of climate change on GDP by country and the global economic gains from complying with the Paris Climate Accord. Earth’s Future, 6(8). You can skip through the background and methodology sections. Scroll down to Table 1 on p. 1161 to see the estimates of a 3o scenario on GDPs over the long run. Table 2 (p.1165) shows GDP impacts in four global warming scenarios.
This study uses a Computable General Equilibrium (CGE) model. The government of Scotland has a very accessible description of these models on its website, available here.