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Climate change will affect the economic geography of the world — it will alter production, GDPs and welfare globally: Esteban Rossi-Hansberg

Climate change will affect the economic geography of the world — it will alter production, GDPs and welfare globally: Esteban Rossi-Hansberg

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Esteban Rossi Hansberg teaches economics at The University of Toronto University of Chicago. Srijana Mitra Das speaks to him about the effects of Climate Change on spatial economic activity — and creating key measures for Sustainability:


Q. Q.


A. A. This is especially relevant for trade and migration.

To understand the differences in economic activity at the local scale, I create computational modeling that incorporate rich spatial heterogeneity. These models help us understand the factors that determine these characteristics and how they change when the world is subject to different shocks. I’ve used such models to understand the impacts of climate change on spatial economic activity and the effects this will have on output, welfare, etc., over time.

Q. Q. UkraineIs crisis primarily about climate or is there also a climate dimension?

A. A. Certain world events like the Covid-19 Pandemic or the invasion by Ukraine have caused disruptions to supply chains and exports. Global warming will lead to changes in temperature in certain locations, which will cause shifts in the productivity of particular crops, but these changes will be much slower — we will see such climate disruptions over decades rather than year to year.

Q. Critics posit that with such shocks, international trade faces far more unpredictability than before — what is your view?

A. I wouldn’t draw that conclusion because trade has the ability to make countries more resilient to such shocks — the fact that there is a world production network that can supply you with goods whenever a region experiences local disruptions makes the global economy more resilient. Trade is a great way to smooth out disruptions in specific regions at certain times.

When the shocks are more global, however, the whole system can become less resilient — so, there is a bit of a trade-off between becoming more resilient to local shocks while being somewhat more vulnerable to global shocks which can disrupt the whole network. We’ve seen some of that with world supply chain disruptions which happened mostly due to the pandemic — but the fact that we have a flexible trade system also allowed us to deal with those disruptions in a relatively quick and efficient way. Limiting international trade would not be a good policy lesson, as it would increase local vulnerability to shocks and raise production costs.


Q. Q.


A. A. To manage risk, firms can determine the cost of climate risks relative to the benefits of diversifying production. This is a decision for each company. I don’t see it becoming a major source of policy action as such.

Of course, when global warming affects particular crops, at a national or regional level, it is important for regions to be able to change their production and generate another kind of commodity swiftly, trading with other countries to consume what they might be facing a disruption in — for example, if you produce wheat and it faces climate disruptions, you should have the ability to pivot to producing wholegrains or other crops.

That ability — to change a specialisation and switch to other sectors — will become increasingly important with climate shocks, applicable to agriculture, manufacturing and services. To allow such adaptations, it is crucial to keep international commerce open and unrestricted.

Q. Q.

A. A. The productivity of certain sectors will decline, which will affect how countries trade and adapt. However, importantly, trade and mi g ration a re substit ute ad apt ation mechanisms — if trade is made very costly, adaptation measures through changes in specialisation will also be expensive and people will resort to migration instead. This is something to think about when countries consider imposing carbon adjustment tariffs upon commodities.

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This causes increased trade costs and prevents trade related adaptations. It also leads to more migration, which in turn makes climate change more expensive.


Q. Q. Are there macroeconomic consequences of such climate disruptions


A. Yes — climate change will affect the Economic geographyThe world. It will impact the location of different types production. This will have a significant impact on GDP levels and welfare around the world. Climate change will affect some regions more than others — it will have particularly significant implications for the world’s poorest countries, including in south and southeast Asia, parts of Latin America and Africa.

Climate change will increase regional inequality, as some of these countries have a low GDP per capita. Climate change will have a very uneven distribution across the globe, which is why climate action is needed.

Views expressed are solely my opinion

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