Economics of Climate Change

Economics of Climate Change


As it is known, macroeconomic environment of the companies greatly depends on the environmental factors. In this regard, it is appropriate to admit that the impact of the climate change becomes more prominent with every year. It is connected with the population growth as well as with the rapid evolvement of the developing countries. Undoubtedly, there are many kinds of nature contamination and most of them are interdependent. Nevertheless, the Greenhouse Effect is rightfully considered to be the primeval reason of the global environmental pollution, which leads to significant economic losses. Comprehending the nature of the Greenhouse Effect one should realize that “clouds, water vapor, and the natural greenhouse gases carbon dioxide (CO2), methane, nitrous oxide, and ozone allow inbound solar radiation to pass through, but serve as a barrier to outgoing infrared heat” (Harris, Roach and Codur, 2015, p. 5). The combination of these elements forms a dense cover. As a result, the temperature of the air and water increases. The described process threatens the survival of flora and fauna by stipulating changes in geography and climate. These changes are negative for the living beings due to a fact that they require rapid adjustment, which enhances competition and, respectfully, selection out of certain species. Addressing this issue from the perspective of the humanity’s performance, it is appropriate to state that economic development is the main factor that assures successful competition in both planes, between countries and within a state. Therefore, the contemporary environmental factors have a considerable impact on the entire business world. Striving to comprehend the financial costs of climate change it is appropriate to survey the impact of the Greenhouse Effect on the economics of the European and Asian states.

The Nature of the Global Climate Change

To begin with, it is necessary to explain that the Greenhouse Effect is mostly connected with the emission of carbon dioxide. In particular, the scientists claim that “the largest contribution is caused by the increase in the atmospheric concentration of CO2” (Harris, Roach and Codur, 2015, p. 4). Linking this peculiarity to the fact that the mankind still heavily depends on the fuels, one can rightfully presume that the noticed climate changes are only the tip of the iceberg. Whereas, the deterioration of the climate conditions is expected to happen in the near future since people need fuel and, thus, are doomed to release CO2. The World Resources Institute estimates that people mostly contribute to the worsening of the Greenhouse Effect through the industries of electricity and heat generation (Stern, 2006, p. 1). In addition, a great role in the emissions of carbon dioxide is played by the land-use industries, for example, by those connected with urbanization, deforestation, agriculture, etc. Apart from that, CO2 release is closely connected with the transport industry. Given the importance of these spheres, it is possible to state that being heavily depended on those areas, the business world will experience a prominent negative impact of the environmental factors.

To be more precise, all economic losses of climate change are divided into two main groups: those that create market damage, and the ones that contribute to the occurrence of non-market damage (Goulder and Pizer, 2006). Regarding the case, market damages comprise the “changes in prices or quantities of marketed goods”(Goulder and Pizer, 2006, p. 2). As a rule, market damages are stipulated by the changes in the value or quantity of products that emerge as a result of the climate changes. For instance, the change in temperature affects the crop of wheat lessening its quantity. A conjunctive example is that the Greenhouse Effect leads to the melting of ices; this process raises the level of the ocean water, thus, the crops may be washed out (Goulder and Pizer, 2006, p. 2). Similarly, non-market damages presume “the direct utility loss stemming from a less hospitable climate, as well as welfare costs attributable to lost ecosystem services or lost biodiversity”(Goulder and Pizer, 2006, p. 3). For example, warmer water encourages certain species of fish to travel farer from the coasts, which complicates fishing and, consequently, negatively affects the productivity. Another example is the decrease of the marine bio-diversity, which implies that firms, specialized in the seafood production, will experience financial losses or even can be selected out. This example illustrates non-market damage caused by climate change, in particular, by the Greenhouse Effect. The next section of the paper will identify and discuss both, market and non-market damages caused to the economics of the European states by CO2 emissions.

The Economics of Climate Change in the European Countries

First and foremost, it should be emphasized that many European states have access to the sea. Many centuries ago this geographic peculiarity provided a number of economic benefits that contributed to the development of the European countries. In the contemporary world the European coastal areas remain significant strategic points that create favorable conditions for international trading, tourism, seafood production and the extraction of the marine minerals.

Nevertheless, the productivity of the corresponding businesses may be compromised by the rapid climate changes that were launched by the Greenhouse Effect. In particular, it is expected that in the 21st century the alterations of climate will be manifested in “an acceleration in Sea Level Rise (SLR), further rise in sea surface temperature, more extreme weather events and storm surges, altered precipitation and ocean acidification” (European Communities, 2009, p. 1). It goes without saying that the economic losses of the above-stated climate alternations are immense. Consider the rationale, 22 members of the EU are the coastal states. These countries are assembled as “the European coastal member states” under the common purpose to address and anticipate the negative implications of the greenhouse effect (European Communities, 2009, p. 3). It is a crucial task bcause, according to scientists, the value of losing 500 m of the coast amounts in € 500-1000 billion (European Communities, 2009, p. 3). In the first place, the economic losses and, respectfully, the measures are directed at the mitigation of the Sea Level Rise (SLR). It is expected that by the end of the 21st century the level of the sea will rise “by 0.18m-0.59m” (European Communities, 2009, p. 3). In this way, the Greenhouse Effect leading to the increase of the sea level is responsible for “flooding, coastal erosion and the loss of flat and low-lying areas” (European Communities, 2009, p. 1). It should be admitted that different coastal areas are susceptible to various SLR-related problems.

Specifically, the Baltic coastline is perceptive for erosion, floods, and reduce of the marine biodiversity. The area of the North Sea is endangered by the possibility of floods and storm-surges. Similarly, the European coastal states of the Atlantic Ocean are in danger of floods and alterations in the marine ecosystems. The countries of the Mediterranean Sea are susceptible for erosion and water salinization. Moreover, the Black Sea marine basin is characterized with the high probability of erosion and changes in the local eco-systems. Finally, the Outermost Regions are known to be heavily dependent on the tourism industry. That is why, the high probability of “cyclones, drought, floods and volcanic eruptions”, which is caused by SLR, has a significant negative impact on the financial well-being of the local dwellers (European Communities, 2009, p. 4). Apart from that, Outermost Regions are also perceptive for the changes in the sea biodiversity.

What makes things even worse is that all coastal states are at risk of experiencing the difficulties in maritime navigation. Consider the rationale, the change in the local climate suggests weather alterations. The necessity to cope with changes will force the companies to adjust to the new conditions. Undoubtedly, the upgrading of the navigate equipment will result in additional costs for the marine companies. Apart from that, the rise of the sea level means that ports and docks must be adjusted accordingly, which also implies the increase of the expenditure. It is estimated that currently implemented programs of annual adaptation that are directed at taming the results of Sea Level Rise cost Europe between “€ 0.49-0.85 billion” (Policy Research Corporation, n. d. p. 5).


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The Costs and Benefits of the Climate Change Adaptation

Comprehending the magnitude of financial loses that are caused by solving and anticipating the negative implications of the Greenhouse Effect, it is necessary to explain that the total costs are being appraised according to the following rationale. There is a certain amount of money spent on mitigation of the climate-related issues that are connected to Sea Level Rise. Specifically, it presumes dealing with the consequences of the Greenhouse Effect (temperature rise, sea water rise) that result in the climatic, geo-, and the changes in biodiversity and water salinization. At the same time, there is a certain amount of money that is spent on adjusting to the new environmental circumstances. In particular, these costs presume helping the locals to adapt their lives and businesses to the climate changes. The Adaptation costs also include programs aimed at the creation of better conditions for the endangered flora and fauna. Moreover, one should understand that there are also the costs of inaction, which means that the neutral reaction towards environmental pollution leads to certain financial losses. The costs of mitigation and adaptation are composed with the costs of inaction. Thereafter, the benefits of mitigation and adaptation are deducted from that amount of expenses.

In this regard, it is necessary to understand that the real costs of adaptation for the EU can hardly be calculated because they are characterized with the remote and, sometimes, indistinct and ambiguous results. Nevertheless, as it was stated above, the corresponding expenditures range between “$ 0.2 billion to € 5.4 billion per year”(Policy Research Corporation, n. d. p. 19). For instance, it is identified that if sea level rises for 1 meter it will cost Germany $ 30 billion spent on adaption to the corresponding climate and geographic changes (Policy Research Corporation, n. d.). Another example is that in the same situation, Poland is expected to spend $ 4,8 billion in order to tame the negative effects of SVR for its coastal area (Policy Research Corporation, n. d.). Simultaneously, to adjust to the new coastal area is assessed to cost Netherlands about $12,4 billion (Policy Research Corporation, n. d.).

The concrete costs of inaction cannot be estimated either; however, they can be approximately foreseen. It is necessary to highlight that the costs of inaction are quite high, which should encourage the states to implement active approaches towards mitigating the negative outcomes of the Sea Level Rise. Regarding the statistics, for the European coastal states the costs of inaction are linked to the following statistics. The overall GDP of “the 22 European coastal member states in 2004 is estimated at about € 9.8 trillion out of which 35% or € 3.5 trillion”(Policy Research Corporation, n. d. p. 17). It should be admitted that this money is made while using the resources of 50 km coastal area. Thus, it is estimated that in 2000 the value of 50 m of the seashore costs “€ 500-1000 billion” (Policy Research Corporation, n. d. p. 17). Processing to observe the costs of inaction for the European coastal states, one should point out that 1 m Sea Level Rise will take “139 000 km² of  land area”(Policy Research Corporation, n. d. p. 18). It will force 13.6 million people to leave their native land, which together with other economic loses, will cost Europe “€ 305.2 billion GDP” (Policy Research Corporation, n. d. p. 18). Revealing more statistics regarding the economics of climate change for Europe, it is appropriate to claim that the rise of water for 1 m is calculated to possess “$ 160-200 billion of economic damages” for the UK capital, London (Policy Research Corporation, n. d. p. 18). Taking into account the above-revealed data, one can rightfully conclude that inaction is rather pricy. Thus, the remaininng policy of inaction should be changed to the active approaches that are aimed at mitigating and adapting to SLR-related issues. Apart from that, it should be stated that even though the adaptation to climate changes is expensive, the benefits of adaptation exceed the costs. Simultaneously, it is necessary to search for more ways of taming the Greenhouse Effect and, respectfully, the Sea Level Rise. The next section of the paper is aimed at observing the corresponding approaches implemented in the East Asia with the purpose to address the climate change.

The Economics of Climate Change in the East Asia

To begin with, it is necessary to clarify that East Asia comprises a number of rapidly developing states, which implies the fast use of natural resources combined with a considerable level of environmental pollution. Specifically, East Asia is represented with the Republic of China, Mongolia, the Republic of Korea and Japan. It contains 1/4 of the global population. Undoubtedly, addressing the needs of these people as well as producing products for import stipulates that this area is noticed to release “30% of the world’s energy-related greenhouse gas emissions” (Westphal, Hughes and Brömmelhörster, 2013, p. 6). To apprehend the magnitude of the increased contamination caused by the emission of CO2 in East Asia it is necessary to refer to Table 1. The presented numbers are calculated in MtCO2 (“million tons of carbon dioxide”) (Westphal, Hughes and Brömmelhörster, 2013, p. 9).

Country /Year  2000           2005         2007         2008          2009            2010

PRC              3,037.3      5,062.4     6,028.4     6,506.8      6,800.7        7,217.1

Japan            1,184        1,220.7    1,242.3      1,154.3       1,095.7       1143.1

Korea           437.7        467.9        490.3        501.7           515.5             563.1

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Mongolia      8.8            9.5               11.1          11.2           12                11.9

Table 1. Total CO2 Emissions in East Asia during the period of 1971–2010 (Westphal, Hughes and Brömmelhörster, 2013, p. 9).

Apart from contributing to the global pollution, this area is characterized with the local increase of temperature. It is not surprising, since East Asia has a rapidly developing economy. While being combined with the considerable level of population it explains the magnitude of the caused environmental contamination.

Moreover, the above-mentioned states continue to grow. Therefore, in the future they must find the ways to adapt to climate changes, but most importantly, they need to elaborate and deploy the programs that can help mitigating the CO2 release. Besides, one should comprehend that, as most European states, the countries of East Asia have access to the sea (except Mongolia). Thus, the Greenhouse Effect in East Asia is also manifested through Sea Level Rise (Westphal, Hughes and Brömmelhörster, 2013). In addition, this geographic spot faces a number of other climate changes, such as the increased acidification and salinity of the ocean water. The change of water chemical structure negatively affects the marine biodiversity and worsens its quality. Apart from that, the change of currencies and temperature leads to the increased amount of storms. Undoubtedly, it complicates the work of the marine-related industries. Moreover, in a long-run, these environmental factors may have a negative impact on the tourism sector since deterioration of the already hot and humid climate will make it less attractive for potential visitors and investors. That is why these states utilize a number of approaches aimed at mitigating Sea Level Rise and other negative implication of climate change. Specifically, acknowledging the seriousness of the environmental situation, the governments of the East Asian states strive to improve the environmental situation applying to planned retreat, accommodation and protection (Westphal, Hughes and Brömmelhörster, 2013, p. 64).

The Costs and Benefits of Climate Change Adaptation in the Coastal Sector

Estimating the economics of climate change in the East Asia, it is necessary to emphasize that the costs of inaction are assumed to be immense. Consider the case, due to SLR China is expected to lose about 27 square kilometers annually during the period of 2010-2050 (Westphal, Hughes and Brömmelhörster, 2013). Similarly, due to the same environmental issue Japan is supposed to lose nearly 3,3 km2. Moreover, the Republic of Korea is claimed to lose about 19-22% of its lands (Westphal, Hughes and Brömmelhörster, 2013, p. 60). What makes things even worse is that many people will be doomed to leave their native lands and migrate elsewhere due to the enhanced temperature that melts glaciers and increases sea level. Under such conditions, the economic costs of inaction are estimated to be $86 billion for Chinese government and around $7 billion for the Japanese (Westphal, Hughes and Brömmelhörster, 2013, p. 60). Without a doubt, the costs of inaction for East Asia are high and, thus, its states invest money in coastal adaptation.

To be more precise, the annual costs connected with the adjustment to the new sea level including the upgrading of ports amounts in more than 4 billion (Westphal, Hughes and Brömmelhörster, 2013). In this terms, the lion share of expenses is attributed to China ($2,1 billion) and Japan ($1,2 billion) (Westphal, Hughes and Brömmelhörster, 2013). Despite the high price of adaptation towards climate changes, it is considered to be effective because it helps avoiding the greater damage caused by inaction and lack of adaptation.