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Heatwaves Are Damaging People, Planet And Profits

Adding to the business case for tackling climate change – research shows soaring temperatures decrease imports, causing losses of millions.
  • New research from Frankfurt School of Finance and Management finds extreme heat causes a reduction in supply
  • Researchers find that when a country’s average temperature is at least 30°C, exports fall by an average of 3.4%
  • An average heatwave costs around 360 million US dollars due to declining imports

An article published in Forbes at the end of December led with the sobering headline that 2022 had broken all previous records for the number of extreme weather events that had occurred around the world. From monsoons and flash floods across Pakistan, typhoons in Japan, and hurricanes battering Cuba and the Southeast of the US, to severe droughts across the horn of Africa, mainland Europe and the UK. And who can forget the wildfires that decimated countless acres of bushland in Australia, and caused “firenados” in California?

Extreme weather is disastrous for the planet – there is no denying that. The unsettling rise in such events has not only caused significant levels of destruction to natural habitats – the recovery of which will take many years – but also to manmade environments as well. Along with this comes huge death tolls – it is estimated by the World Health Organisation (WHO) that 15,000 globally died due to extreme heat alone in 2022.

Though the effects of these weather events are most visibly detrimental to people and planet, there is a growing body of evidence that confirms the damaging impact of climate change upon global economies too. Whilst saving people’s lives and ensuring the future of the planet are certainly the most important reasons to tackle climate change, all too often big businesses are reluctant to change their ways if it costs them financially to do so, and not clear benefit can be forecasted for their investment.

However, new research from Frankfurt School of Finance and Management shows that an average heatwave causes around $360 million US dollars in losses, due to the impact such conditions has on imports worldwide.

For those in want of a more robust business case for going green the study, conducted by Dr Oliver Schenker, Professor of Environmental Economics at Frankfurt School of Finance and Management, alongside his colleague Dr Daniel Osberghaus, Senior Researcher at the ZEW Mannheim Research Unit ‘Environmental and Climate Economics’, not only reveals that businesses and governments have a moral duty to tackle climate change, but provides a financial incentive to do so too.

The researchers were keen to answer three questions. First, do heatwaves affect exports? Second, if so, through which channels do these events affect bilateral trade and which characteristics govern the effects? And third, what is the spatial distribution of the costs of these events and how much of these costs arise in not directly exposed countries?

To do so, Drs Schenker and Osberghaus collected over five decades of monthly bilateral trade and weather data; making more than 3.8 million observations. From this data, they discovered that in a month when the average temperature is at least 30°C, exports decreased by 3.4 percent relative to a month with an average temperature below this threshold.

How can extreme temperatures specifically cause this drop? The researchers say that it is all to do with productivity. Heatwaves cause labour productivity to drastically fall, causing a supply shortage and meaning there is less possibility to export, creating a knock-on effect to global trade capabilities. This leaves buyers with no option but to search elsewhere for their products. This case is further proven by the researchers finding that the more labour-intensive the exports of a country are, the stronger the reduction in exports is during a heatwave.

What’s more, the consequences of decreasing trade are felt in regions outside of those experiencing such uncomfortable temperatures. The research revealed that two-thirds of the USD$360 million cost of a heatwave is actually shouldered by countries not directly impacted by the extreme heat. For example, if there is a drought in Ethiopia it is likely that the rest of the world will feel the effects within the coffee market, given Ethiopia is the 5th largest global supplier of coffee. For the United States, being the largest global importer of coffee, this reduction is likely to hit hard.

Can anything be done to minimise the damage of these issues? Those looking to import from countries experiencing heatwaves have few options when supply drops, according to the researchers. Either they can pay a higher cost, whether that be from the current exporter experiencing lower supply or from elsewhere, or they simply have to accept the losses, meaning a lack of supply and sales in their own countries.

And, unfortunately, the problem is only going to become more costly unless we are able to curb rising global temperatures. Based on a medium climate projection – a scenario of global climate development that is neither too pessimistic nor too optimistic – the researchers looked ahead and calculated the trade losses to be expected from future heat waves. For the period 2020-2039, annual global trade is set to reduce by as much as USD$735 million, compared to 2015.

To tackle this issue, one might suggest becoming more protectionist in trade policies and reducing imports, thus decreasing reliance on other countries. However, Dr Schenker says this would not be the correct approach. “Trade policies that focus on being protectionist simply do not work,” he says. “In fact, on the contrary, it is global trade with its substitution possibilities that reduces the economic losses caused by climate change.”

Instead, it seems we truly have no other option that to put the hard work in. The researchers state the best approach to tackling this issue is collective global action to further reduce the emission of greenhouse gases. They also suggest that we must improve infrastructure and build resilience to withstand more frequent and severe heatwaves until the action we’ve taken to heal the planet finally begins to pay off.

And that hard work and resilience will be vital. As it stands, according to research from the University of Oxford’s Smith School of Enterprise and the Environment, the world is not on track to meet those vital international climate targets agreed seven years ago in Paris, when it comes to reducing its carbon footprint. A report from United Nations Climate Change following COP27 warns the same; countries are “bending the curve of global greenhouse emissions downwards” but such efforts are currently insufficient enough to limit the rise in global temperature – let alone decrease it. Until our industries can curb their emissions, global temperatures will continue to rise, meaning there’ll be plenty more extreme weather scenarios in our future.

Enough talking, let’s get to work.

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