Economic losses from weather extremes shown to amplify around the world
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In the globally connected economy, the severe impact of climate change and consequent extreme weather events will increasingly cause negative ripple effects along supply chains across global territories, according to a study from the Potsdam Institute for Climate Impact Research.
As human-induced climate change progresses, the frequency and intensity of extreme weather events is likely to increase, leading to a high probability of increasing direct production losses and consequently to higher consumption losses.
Disruption caused by extreme weather events typically impacts a country's health sector, as well as the economy through disturbances to income, employment, economic growth, energy supply and food security.
In the aftermath of an extreme weather event, regions tend to react in a variety of ways. Some might not manage to recover in between subsequent events, while others might even profit from disasters when the economy is built back to be more resilient or efficient after a shock. On an inter-regional level, local production shocks induced by extreme events can - via price and demand fluctuations in the highly interconnected global trading network - result in losses or gains in production or consumption elsewhere in the world.
In a globally connected economy, damages can cause remote perturbations and cascading consequences — a ripple effect along supply chains.
The Potsdam study shows how an economic ripple resonance that amplifies losses when consecutive or overlapping weather extremes and their repercussions interact. This amounts to an average amplification of 21 per cent for climate-induced heat stress, river floods and tropical cyclones. Modeling the temporal evolution of 1.8 million trade relations between regional economic sectors, the study suggests that the regional responses to future extremes are strongly heterogeneous in their resonance behavior.
The induced effect on welfare varies between gains due to increased demand in some regions and losses due to demand or supply shortages in others. Within the current global supply network, the ripple resonance effect of extreme weather is strongest in high-income economies — an important effect to consider when evaluating past and future economic climate impacts.
“Ripple resonance, as we call it, might become key in assessing economic climate impacts especially in the future,” said Kilian Kuhla, first author of the study, from the Potsdam Institute for Climate Impact Research. “The effect of weather extremes in our globalised economy yield losses in some regions that face supply shortages and gains in others that see increased demand and thereby higher prices. But when extremes overlap, economic losses in the entire global supply network are on average 20 per cent higher. This is what we see in our simulations of heat stress events, river floodings and tropical cyclones and it is a most worrying insight.”
Generally, extreme weather leading to, for example, the flooding of a factory does not only lead to direct local output losses. It is known that the economic shocks also propagate in the global trade network. The researchers found that these propagated effects not only add up, but can in fact amplify each other. The researchers modelled the response of the global network, calculating 1.8 million economic relations between more than 7,000 regional economic sectors.
While not all countries suffer from the ripple resonance effect, most that are economically relevant do. China, due to its prominent position in the world economy, shows an above-average effect of more than 27 per cent of extra losses when extreme events overlap compared to when they hit independently from each other.
For China, the ripple resonance of consecutive disasters has a crucial impact on its economy, which experiences significantly higher losses of consumption due to heat stress than due to flooding. Nevertheless, the overlapping of event categories (total impact) causes an increase in consumption losses which exceeds the sum of the separate losses (aggregate impact). China thus exhibits a resonance amplification factor, which implies that a fourfold increase of aggregated consumption losses roughly translates to a fivefold increase in total consumption losses. Furthermore, China experiences one of the highest resonance offsets. With such a high loss offset, China is able to mitigate consumption losses for each disaster category individually; decreased foreign supply can be buffered by increasing domestic production.
“The phenomenon of economic ripple resonance means that two separate incidents send shock waves through the world economy and those waves build up, like a tidal wave,” said Anders Levermann, department head at Potsdam Institute and a scientist at Columbia University in New York.
“Supply shortages increase the demand and that increases the prices. Firms have to pay more for their production goods. In most cases, this will get passed down to the consumer. Since weather extremes happen abruptly, there’s no smooth adaptation of capacities and prices at least for a short period of time. If other suppliers fail, due to economic repercussions of another weather extreme elsewhere, the interfering price shocks are intensified.
“If something gets rare, it gets expensive, and if it gets rare worldwide it gets very expensive – clearly, that’s not new. The new thing is the overlap. So far, people mostly looked at the local damage or at most the economic repercussions of one disaster at a time. Now we find that a second disaster happening at about the same time, even if it’s in a different corner of the world, can lead to higher worldwide economic losses.”
This discovery holds true not just for simultaneous but also for consecutive disasters, if the economic effects of the different disasters overlap. “By allowing climate change run wild, we add climate-induced economic losses on top of everything else. If we do not rapidly reduce greenhouse gases, this will cost us – even more than we’ve expected so far,” Levermann added.
The researchers claim their study demonstrates the importance of considering the interaction of the economic response to consecutive events in order to grasp the full picture of the economic impacts of climate change. Resonating economic effects leading to insufficient adaptation and a false sense of preparedness must be considered for further adaptation measures and mitigation efforts, the authors conclude.
The research paper, 'Ripple Resonance Amplifies Economic Welfare Loss from Weather Extremes', is published in the journal Environmental Research Letters.
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