Extreme heat spreads economic costs. We must work harder at tackling it

Heatwaves cost more to trading partners through lost imports than they do to the countries that experience them, researchers in Germany have demonstrated, writes James Moore

Drying up: a reservoir in Wales that fell victim to the extreme heat in Britain this summer (Getty)

To suggest that heat of the kind Britain and numerous other countries experienced this summer damages productivity is clearly a statement of the obvious.

But there’s more than that to a recent study by ZEW Mannheim and the Frankfurt School of Finance & Management. It has a fascinating sting in its tail.

In the study, Daniel Osberghaus and Oliver Schenker examine the impact on international trade of such temperature shocks – the sort of extreme weather events that are likely to become a lot more common as the climate crisis deepens.

Falling labour productivity – because it is too hot to work, or at least to work effectively – reduces output, causes supply shortfalls, and results in lower exports. Obviously, this hurts the economy of a country that experiences an extreme heat event.

But fewer exports also means that problems are created for the customers of those exports. These importers either have to take the hit, and upset their customers, or they have to switch to other suppliers.

This results in lost business, or in higher costs resulting from the switch itself, which is obviously disruptive. The replacement imports may also be more expensive. The product may be less good.

Scale that up and you’ll see that an extreme weather event in country A is going to have knock-on effects in country B and country C, especially if they do a lot of trade together.

The researchers show that this process results in “economically and statistically significant costs in countries not directly exposed to the event”. In other words, the costs of extreme heat events get exported, instead of goods.

The researchers find that a typical heatwave can result in costs of $360m (£330m) due to declining imports worldwide. But here’s the kicker: two-thirds of those costs have to be shouldered by countries that are not directly affected by the heat, because of the impact on their imports.

The research also looks at a medium climate projection – a scenario of global climate development that is neither too pessimistic nor too optimistic – to calculate the expected trade losses to be expected from future heatwaves. You won’t be surprised to learn, unless you’re drinking climate-denial Kool-Aid, that for the period from 2020 to 2039, annual global trade is expected to be reduced by about $735m as a result of extreme heat when compared to 2015.

The Trump administration revised America’s official, formerly global, social cost of carbon (SCC) figures, to consider only climate impacts occurring domestically in the continental United States. Of course it did: America first!

This was reversed by the Biden administration, mainly on the basis of ethical arguments. We should, of course, all pay due regard to ethical and fairness arguments. The world would be a better place if we did.

However, the researchers argue that if the costs of climate change are propagated through international trade, and hence also borne by countries not directly affected by heatwaves, “this provides an argument to take into account global climate impacts for the SCC calculation even from a purely selfish perspective”.

With the majority of the costs falling not on the country experiencing the heatwave but rather on its trading partners, it is thus the Biden administration, not the Trump administration, that is putting America first when it comes to carbon costs.

Globally, the study serves as a welcome addition to the growing weight of evidence of the deeply malign economic consequences of a heating planet.

These are being manifested through higher insurance premiums, lower productivity, lost business, the impact on health services, and in the cost of clearing up afterwards. And there is more to come.

Tackling climate change is both an economic and a political necessity but it is also (as the study demonstrates) the pragmatic course to take. We need to work harder at it.