Economics of Climate Change: The Winners in a Warmer World

Source: dokpri

On September 23rd 2019, young climate activist Greta Thunberg addressed the U.N.’s Climate Action Summit, delivering a message to world leaders:

“We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you!”

Greta’s explosive address was a late, polarising stimulus in the climate movement. Through her speech Greta delivered her ultimatum, testing the loyalty of governments in stopping climate change:

“You are failing us. But the young people are starting to understand your betrayal… And if you choose to fail us, I say: We will never forgive you”.

Almost 3 years later, it’s hard to justify the ultimatum’s success. Global energy-related carbon dioxide emissions rose to their highest level to 36.3 billion tonnes in 2021, and while several environmental milestones have been achieved, it’s clear that Greta’s forgiveness is not a national priority for most world leaders.

The Dilemma of Climate Change

Several days after the summit, Russian President Vladimir Putin criticised Greta for her naivety: “No one has explained to Greta that the modern world is complex and different and … people in Africa … want to live at the same wealth level as in Sweden.” Putin’s response illuminates the classic climate-change trade-off: to prioritise one nation’s economic growth or its environmental sustainability.

Yet an alternative exists: a nation could potentially benefit from the effects of climate change. Putin’s response to Greta might implicitly show his government’s contentment with the ‘drawbacks’ of this global phenomenon. In a warming world, Putin’s cabinet doesn’t only accept the existence of ‘climate losers’, they’re also aware of the existence of its winners.

It’s understandable to see the concept of ‘winners’ in a warmer world as something unrealistic. The general public is always inundated with catastrophic warnings on the lose-lose scenario of climate change. Nevertheless, the effects of global warming couldn’t be generalised across different countries. While a rise of 2℃ could incur extreme droughts in Northern Africa, that same temperature increase would only allow mild warm spells in the Siberian plains. NASA said it best: “the impacts of climate change haven’t been spread evenly around our planet and they won’t be in the future, either.”

From this, global warming should be regarded as an asymmetric externality which benefits some regions and harms others, depending on how it affects every nation’s optimal climate conditions. As human productivity peaks at temperatures around 12.77 ℃ (Burke, 2015), warmer regions that stray higher from that optimum might suffer, while colder regions that draw closer to that optimum will be benefited.

The Awakening of the Arctic

No region in the world can capitalise global warming better than the Arctic. What was and still is considered a frigid region neglected as a vast, inhospitable wasteland has now become more temperate and ‘flexible’ for economic growth. The states situated around the northern pole — Russia, Canada and the Nordic countries — are now presented with warmer opportunities on three economic prospects: agriculture, shipping routes, and extraction of natural resources.

For one, thinner sea ice in the Arctic has opened access for more extraction of natural resources, with the Arctic to share an estimated 13 percent of the world’s proven oil and gas reserves. The arrival of new permanent oil and gas extraction stations will stimulate economic activity in the Arctic — pouring in capital and labour to the region. Russia already took advantage of this opportunity by offering a five percent reduction on its production tax for all oil and gas developments for the first 15 years, hoping to capitalise its 43 large Arctic oil and natural gas fields in its Exclusive Economic Zone (EEZ). Meanwhile, Norway, which prides itself on its oil fund, has already awarded Arctic oil exploration permits to several petroleum companies in 2021. The smoother process of offshore extraction in the warmer Arctic accelerates the region to become an energy powerhouse.

Figure 1: A majority of the seven Arctic basins that holds the Arctic’s oil and natural gas resource are located offshore, Source: Geology.com

A warmer Arctic would also allow for new shipping routes such as the Northern Sea Route — an Arctic shipping lane stretching from the Barents Sea to the Bering Strait. While the route is already long navigable every summer, if a warmer and ice-free Arctic exists in the future, shipping vessels will be able to traverse the area all year long, inducing an immense impact on global trade. This would reduce about one-third of the shipping distance and time between Northwestern Europe and Northeast Asia, increasing the export values of products from the Arctic states. Two-thirds of the eight percent of world trade that is transported through the Suez Canal is also expected to be re-routed over the shorter Northern Sea Route, transforming the region into a busy global trading route that benefits the economies of the Arctic nations.

Figure 2: A visualisation of the Northern Sea Route, relatively shorter than the Southern/Existing Sea Route that passes through the Suez Canal, Source: The Economist

Figure 3: Changes in export values (by percentage) for selected countries. Northern European states collectively experience an increase in export values from the Northern Sea Route, Source: CPB Netherlands Bureau for Economic Policy Analysis

The most promising prospect from a warmer Arctic might be the region’s agricultural sector. An increase in global temperatures would allow an earlier onset of spring and a longer warm season suitable for growing crops in arctic regions. Russia — the definite landowner of the Siberian plains — is the biggest beneficiary from this phenomenon. If carbon dioxide emissions remain continuously high, the permafrost in Siberian soil will decrease by more than half in 2080, causing one-third of its land mass to be “fairly favourable” for civilization, and approximately half of the two million miles of Siberia could become available for farming (Parfenova et. al, 2019). Besides Russia, Norway — who’s agricultural sector currently contributes a measly 1.88 percent to its GDP — can benefit from a 25–30% increase in potato yields and a 14% increase in wheat yields (Brien et. al, 2016). The presence of new breadbaskets secures the economy and population of the Arctic nations.

The Geoeconomics of Global Warming

The existence of winners and losers in a warmer world spawns several geopolitical and economic issues. This should be obvious: the economic benefits that Arctic nations receive from global warming do not exist in a vacuum, but rather exist in tandem with the economic damages received in temperate and tropical regions. This relationship can be inherently zero-sum: when one country suffers from climate change, another country could take advantage of its losses.

For instance, the United States currently provides a third, two-fifth and one-tenth of the soy, corn and wheat supply to be traded globally to 174 countries, respectively. However, if temperatures keep rising, crop yields from the midwestern to southern states could fall by up to 90 percent as the optimal climate for its crops move to the Canadian border, where 4.2 million square kilometres of Canada’s land are now warm enough for cultivation. On the other hand, Egypt in a warmer world, who needs to deal with fewer shipping traffic and profit from its Suez Canal due to the Northern Sea Route, will also experience more instability on their food supply due to more frequent droughts. This stands opposite to Norway, who can start cultivating more variety of crops in its northern regions.

Figure 4: The varying impact of global warming to each country’s GDP per capita, with future temperature changes estimated from the IPCC CMIP5 model; northern European and Arctic countries collectively experience a potential increase in GDP per capita, while equatorial countries suffer the largest decrease, Source: Stanford.edu

Overall, this win-lose dynamic from global warming is best illustrated through its potential effect on a country’s GDP per capita. The results are striking: besides the Arctic nations and several European states, all other nations will suffer a GDP per capita decrease if temperatures increase. This difference is magnified if Indonesia and Russia are compared: Indonesia, an archipelagic state situated on the equator, will experience an 85 percent decrease in GDP per capita by 2100, while Russia, which encircles the north pole, will experience a gigantic 419 percent increase (Burke, Hsang & Miguel, 2015).

Figure 5: Future increases in temperature will cause higher GDP per capita growth in Russia, Source: Stanford.edu

Figure 6: Future increases in temperature will cause lower GDP per capita growth in Indonesia, Source: Stanford.edu

Despite the bleak future of non-Arctic nations, it’s not justifiable to accuse the Arctic states for being selfish and callous. Every nation-state is expected to act in their own self-interest; which — in the theories of classical economics — is believed to produce the most economic benefits. This is seen in Russia which, despite signing the Paris Agreement, has explicitly stated through a decree (№3193-R) to “use the advantages” of warmer temperatures. Labelling this as a ‘selfish act’ is difficult when Russia is striving to boost the agricultural productivity of its impoverished Siberian republics, hoping that The Tuva and the Altai, among its many republics, can escape from its 40 and 25 percent poverty rate (Zubarevich, 2019).

Nevertheless, even if Arctic nations have the freedom to take advantage of global warming, an immense change in the world’s geopolitical system and global wealth inequality can definitely appear. Northern, wealthier Arctic countries might benefit from higher economic growth, but poorer, southern countries will have their economies hit the hardest, destabilising their political institutions. This is reminiscent of how old-age empires — the Mayan, Akaddian, Khmer — collapse due to major climatic shifts. Discontent from the economic stress of their country, more populations from the south might migrate north, and coupled with optimum food security and natural resource ownership, a new great age of ‘Arctic power’ might begin.

From this set of dilemmas, it’s best to deduce that the future of global warming will be dependent on a game of self-interest. The world might one day condemn certain countries from capitalising on global warming, but should they disregard the potential advancements of impoverished Arctic communities? If the climate movement turns successful, should we let Arctic nations bear the loss of what might have been their path to prosperity? Are there economies that we should ‘sacrifice’ for an environmentally secure world? And, if so, whose economies should we actually ‘sacrifice’ first?

A Warmer, Complicated World

Greta’s ultimatum at the U.N.’s Climate Action Summit might have lingered as a mere echo in the consciousness of world leaders. In a world where winners can exist in a warmer world, it can be hard to prove to certain governments that they’re betraying and failing their nation’s future.

Putin’s remark to Greta could explain why the climate movement is a fruitless endeavour: “The world is a complex and different place”. Yet, at the same time, it can be wielded as a reason for the movement’s importance: while climate change may economically benefit the Arctic states, it would still damage the rest of the globe.

To answer the question on whose economy should be prioritised through the course of global warming, a simple utilitarian approach of achieving the greatest good while creating the least amount of harm might be best. Or perhaps, in an extremely ideal scenario, every state’s self-interest for their economy could be put aside, and every invisible hand in this climate dilemma should not wrestle, but work together to create a fair, impactful consensus.

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By Gopas Teofilus Silalahi | Ilmu Ekonomi 2021 | Staff Divisi Kajian Kanopi 2022

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