The State of the World Economy in Light of Climate Change


Trying to predict how much the world will heat up in the future and how this will affect global activity is at best a highly complex undertaking. Global warming has both positive and negative effects. The response to technological advances and their ability to influence the global warming process is also unknown. Any assessment must also include a longer time horizon than those typically used by those involved in financial markets. However, as public awareness of the issue has grown, so has the need for shareholders to provide views on the environmental impacts of the companies they control and the impact climate change will have on those companies' supply chains.

Emerging shortages, especially in agriculture, are expected to lead to higher inflation.

Weather has a major impact on crop yields, and as climates become more extreme, crops may fail to grow in areas where agricultural production is essential. In addition, consumers' disposable income has been squeezed due to rising global food prices. Other areas will help mitigate these consequences. However, the general trend is that food price increases are intensifying.

Scarcity of land can also lead to higher inflation. As the planet warms, some areas may become uninhabitable, leading to widespread resettlement.

These changes will have political and social ramifications, increasing pressure on increasingly scarce resources. Essentially, more and more people in the world will have to squeeze into smaller and smaller areas. However, like the effects of food inflation, this is being attenuated by the gradual transformation of previously uninhabitable areas into places where people can live comfortably.

When switching to renewable energy, prices go up.

Another factor contributing to inflation is rising energy costs. As global warming causes us to have to account for hot summers and cold winters, we need more electricity to air-condition and heat our homes and places of business. Higher temperatures affect the efficiency of current power plants, which could lead to reduced supply and a corresponding increase in prices. Taxing fossil fuel power generation is a policy step that governments can take to encourage the transition to green energy; however, this could lead to hyperinflation in the energy sector in the short to medium term.

Since energy is the backbone of most manufacturing industries, the inflationary effects of rising energy costs will permeate the global economy. Depending on how quickly things change, the growing popularity of renewable energy could slow the rate of rising energy costs in the future.

Insurance premiums are increasing due to the risks of climate change.

Companies in the insurance market recognize that they may bear a disproportionate share of the costs associated with climate change. Businesses are already feeling the cost of weather disasters as insurers have to pay out property damage claims. Therefore, the insurance industry must prepare for the consequences of climate change.