Summer of drought and floods shows the need to tackle economic impact of climate change

The economic, financial and political effects of climate change are already visible, with the disruptions experienced this summer a preview of things to come
With extreme weather increasing in frequency and intensity, it’s past time for governments and investors to factor climate change into their decisions

Tai Hui

Published: 11:30am, 16 Sep 2022

Why you can trust SCMP

Extreme weather and natural disasters are happening regularly. With climate change, these incidents are becoming more frequent and their economic impact is getting more serious.

While many governments have pledged to become carbon neutral in the next 30 to 40 years, additional policies are needed to address the more immediate effects of these disasters. Not only will these solutions require additional resources from governments, they need to be innovative as well.

This summer, we have seen heatwaves in many parts of the world, including Europe, South Asia and China. Closer to home, July was the hottest month in Hong Kong since records began in 1884. For many parts of Europe, the heat caused disruption in airports as their runways were not designed to operate at such high temperatures. Construction and outdoor activities were put on hold.

The heat also led to droughts and brought disruption to transport and power generation. Rivers are important routes for moving goods and people and, in Europe and China, they were cut off by low water levels. This also meant hydroelectric power stations don’t have enough water to operate. In France, nuclear power stations have had to reduce their output because the water from nearby rivers has become too warm to properly cool the plants.

Meanwhile, other parts of the world experienced devastating flooding. Pakistan’s floods have killed more than 1,400 people while another 33 million have been affected. Seoul saw its highest rainfall in more than 100 years, and the subsequent flooding killed 13 people and damaged thousands of buildings.

01:25

Gone in seconds: Pakistan hotel is swept away by flooding as country seeks more international aid

It is undeniable that rising global temperatures are causing this extreme weather. The humanitarian and economic costs of these disasters are expected to rise over time. These could be real tests for governments’ policies aimed at reducing greenhouse gas emissions in the coming decades while at the same time addressing the immediate aftermath of these disasters.

In the long run, what governments need to do is obvious – enhance renewable energy production capacity and build their power grid and storage facilities to overcome the technical challenges of solar, wind and hydroelectric power generation.

Yet, the disruption to hydroelectric and nuclear power mentioned above requires policymakers to further diversify power sources. Promoting energy conservation is also needed as more power-efficient home appliances and production methods can help reduce the burden on power generation.

In the near term, these disasters are going to test policymakers’ ability to respond promptly. Central banks might not be very effective in this area, given the time lag for monetary policy to work through the financial system and the economy.

The Chinon Nuclear Power Plant, near the River Loire in Avoine, France, is seen on September 8. Heatwaves have dried up rivers across Europe, forcing nuclear power plants to reduce output. Photo: Bloomberg

However, one could argue that these extreme events are likely to lead to higher inflation in the long run and central banks will need to maintain higher interest rates. Fiscal support is expected to be the main source of support for the economy and relief for those affected by disasters. How to ensure such resources are spent effectively is another challenge policymakers will need to consider.

This implies that some economies with weaker fundamentals could see a greater risk of economic or financial crisis. For many emerging markets, the current environment of high energy and food prices is already straining their economy. A natural disaster could set back their economic development for years, even decades.

Amid the discussion of supply chain diversification, these incidents of extreme weather will also be a factor in business’ decisions on whether to invest. They will need to consider the risk of disruptions and, more importantly, whether local governments have contingency plans and the capacity to cope with these events.

Economies that have more resources and better planning could attract more foreign direct investment, and not just those with cheap labour and tax incentives. This could exacerbate the income gap between rich and poor nations, even within emerging economies.

The economic, financial and political impact of climate change is already here. Just as governments will need reshape their policies to influence the long-term outcome and deal with the short-term impact, investors around the world cannot ignore the implications on their investment portfolio from both structural shifts and day-to-day volatility.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management