Recent climate change-related natural disasters and extreme weather conditions have taken a toll on economies worldwide, displaying the impacts of climate change.

The estimates of macroeconomic damages from climate change vary significantly, depending on the vulnerability of different economies and regions, the resilience of key socioeconomic systems like infrastructure, and climate action.

Previously, scientific evidence established that a 1°C rise in global temperature causes up to a three per cent GDP loss to the global economy. However, the latest evidence, according to the report by the National Bureau of Economic Research (NBER), claims that a 1°C increase will result in a peak loss of 12pc to global GDP.

This new evidence indicates that the welfare loss precipitated by a moderate increase in global warming is comparable to the damage caused by a major domestic war. This suggests that climate change is not merely a risk-inducing factor in economies; instead, it itself poses several direct and indirect risks, proving further the complexity and peculiarity of the modern economy.

The most common manifestation of climate change is temperature increase. This causes capital depreciation and a loss of labour productivity, resulting in a reduction in total factor productivity (TFP).

TFP loss due to temperature increase is non-linear and heterogeneous. This heterogeneity is attributed to differences in the advancement and economic progress of countries, including the quality of their institutions and the composition of TFP.

Evidence indicates that a 1°C increase in global temperature will result in a peak loss of 12pc to global GDP

Low-income countries try to prioritise economic growth to overcome their long-standing socioeconomic challenges while overlooking climate mitigation and adaptation. However, this adversely affects their TFP and invokes a vicious cycle of climate vulnerability and slow economic growth.

Similarly, low-income economies face more disruptions from decarbonisation and low-carbon transition due to carbon-intensive economic systems and high abatement costs.

While climate change is generally treated exogenously in economic modelling, there may exist a reverse causality, as past economic growth could have feedback effects in terms of an increase in future temperature. This also has more serious consequences for low-income countries.

In addition to the exogenous shocks induced by climate change and their massive impacts on sustainable economic growth, the global economy is confronted with a tough choice to either adopt decarbonisation or boost economic growth.

Decarbonisation is essential for the low-carbon economy and green industrialisation, without which the achievement of net-zero targets is impossible, while economic growth is integral to creating economic opportunities and eradicating poverty.

Unfortunately, there is no easy way to strike a balance between decarbonisation and economic growth; instead, a middle course must be crafted and then trod carefully. This is what makes planners’ and policymakers’ lives difficult, and this is where prudent economic management is invited and, arguably, much needed.

So, what options do we have to tackle climate change-induced negative economic shocks and the losses to global GDP? Well, unfortunately, there is no single prescription. The solutions are supposed to be context-specific and tailored to local conditions while considering the extent of vulnerability and the nature of the impacts.

Low-income countries prioritise economic growth to overcome socioeconomic challenges while overlooking climate mitigation which adversely affects their productivity, invoking a vicious cycle of vulnerability and slow economic growth

This means a fit-for-purpose approach needs to be adopted, and solutions must be custom-made. This is especially critical for those low-income countries that are hooked on the advice of foreign consultants who have impeccable skill sets but are devoid of local context and socio-cultural dynamics.

Nevertheless, the broad set of gadgetry includes a voracious increase in the natural resource base of economies, a reduction in the ecological and carbon footprint of resource-intensive industries, which can be achieved by improving efficiency, and the creation of carbon-sink, the use of nature-based solutions for flooding and urban heat, and buffering agri-based industries against climate-shocks to mitigate food shortages, inflation, and subsequent impacts for other industries and international trade.

Further efforts could include investment in climate-compatible and resilient infrastructure, the propagation of climate-friendly technologies, and generous incentives for the uptake of renewables, especially solar technology in low-income countries. There is no denying that the last will potentially be the most difficult for the very existence of petro-industries.

The writer has a PhD in economics from Durham University, UK and is director of research programmes for the Social Protection Resource Centre, Islamabad

Published in Dawn, The Business and Finance Weekly, July 29th, 2024