The winners and losers from climate change - Capital Economics
Emerging Markets Economics

The winners and losers from climate change

Emerging Markets Economics Focus
Written by Gareth Leather
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Climate change will be more costly to EMs than developed countries, with parts of Africa, as well as South and South East Asia most vulnerable to rising global temperatures. That said, some EMs could benefit as investments to mitigate climate change increase. One group of winners will be commodity producers that are able to provide the resources needed for the transition to cleaner forms of energy.

  • Climate change will be more costly to EMs than developed countries, with parts of Africa, as well as South and South East Asia most vulnerable to rising global temperatures. That said, some EMs could benefit as investments to mitigate climate change increase. One group of winners will be commodity producers that are able to provide the resources needed for the transition to cleaner forms of energy.
  • The science of climate change lies far outside our area of expertise, but the simple fact is that all of the scientific evidence available shows that global temperatures have been rising in recent decades and are now about 1°C higher than they were before the industrial revolution.
  • The Intergovernmental Panel on Climate Change (the UN body for assessing the science relating to climate change) estimates that, without significant action to prevent carbon emissions from rising, the average global temperature will keep rising. The COVID-19 pandemic has led to a slump in global GDP but is unlikely to have a significant impact on the future trajectory of global carbon emissions.
  • There are many ways in which climate change will affect EMs. One is increased flooding and other natural disasters. In 2011, massive flooding in Thailand caused production in many sectors to shut down, resulting in disruptions to supply chains that fanned out across Asia. The costs of rebuilding were estimated at around 3% of GDP. This is money that could otherwise have been invested in new infrastructure, education and other public goods that could boost long-run development.
  • Climate change is leading to the invention of new technologies that is helping to accelerate the shift away from fossil fuels. This will hit oil exporters hard, especially those in Latin America and Africa. But most EMs are net oil importers and should benefit from the emergence of greener sources of energy that are cheaper than oil and can be produced domestically.
  • Climate change will also have an impact on agricultural productivity. Rising temperatures won’t have an impact on agricultural productivity everywhere, but in West Africa and parts of Asia, productivity in the agricultural sector could fall by 20% or more over the course of this century.
  • There is disagreement among experts as to the overall impact of climate change on economic growth. However, there does seem to be a consensus that anything over a very marginal increase in global temperatures will harm the global economy. According to forecasts from the World Bank, global GDP would be around 3% smaller by 2100 under a scenario in which global temperatures rose by 3°C by 2100 than it would otherwise be.
  • EMs will generally be hit harder than DMs. The worst-hit countries in Africa as well as South and South East Asia could be 10% smaller than in a no-climate-change scenario. It is important to note that the most vulnerable EMs are also fast-growing. The effects of global warming won’t alter the fact that GDP in all affected countries will be far larger in a few decades’ time than it is today.
  • One of the key implications is that income convergence will be slower. With the greatest cost of climate change falling on the poorest countries, climate change will add to the headwinds that are facing low-income countries. This has only strengthened our long-standing view that the “golden age” of EM convergence” around the turn of the century – during which emerging economies almost all grew significantly faster than developed markets – is over.
  • But it isn’t all doom and gloom. Some economies will benefit. One group of winners will be commodity producers that are able to provide goods needed for the energy transition. If food production is disrupted in equatorial countries, then producers in Eastern Europe and Latin America might find new export markets.

The winners and losers from climate change

It is not, of course, possible to precisely model all the effects of climate change on emerging economies. And even if it were, such an exercise would not necessarily touch on the wide variety of scientific, social, and political questions that are far outside our area of expertise.

What this Focus can do, however, is provide a framework for thinking about three key questions. First, how certain are we that the world’s climate is warming? Second, what are the channels through which higher global temperatures will affect economies? And third, how will these effects be distributed amongst different emerging markets?

A clear and present danger

The science of climate change lies far outside our area of expertise, and so we won’t dwell on the technical aspects of what is happening to our planet’s climate. The simple fact is that all of the available evidence shows that global temperatures have been rising in recent decades and are now about 1°C higher than they were before the industrial revolution. (See Chart 1.)

Chart 1: Global Average Temperature Change (°C)

Sources: IPCC, Met Office Hadley Centre/Climatic Research Unit, US Global Change Research Program

The overwhelming majority of experts agree that this is mostly due to man-made carbon emissions, which have created a “greenhouse” effect that traps heat in our atmosphere. This effect will almost certainly continue to push up global temperatures over the coming years.

The pace at which this effect continues to warm the planet is uncertain since it depends on both the rate at which we continue to release carbon into the atmosphere and the responsiveness of the climate to incremental changes in carbon saturation. Neither is fully knowable, which creates an unavoidable degree of uncertainty. That said, it is worth noting that climate models have become notably more accurate in recent years.

Notwithstanding those uncertainties, the Intergovernmental Panel on Climate Change or IPCC (the UN body for assessing the science relating to climate change) is generally viewed as representing the international scientific consensus. Chart 2 shows its projections for global temperatures, added to the historical data in Chart 1. By 2100 temperatures could rise by a further 3°C from their current levels.

Chart 2 Global Average Temperature Change (°C)

Sources: IPCC, Met Office Hadley Centre/Climatic Research Unit, US Global Change Research Program

Many environmental campaigners had hoped that the current COVID-19 pandemic would lead to a permanent drop in energy consumption, especially of the kind causing greenhouse gas emissions. The lockdowns of March and April did lead to a slump in energy consumption as people stayed at home and large sectors of the economy closed.

Chart 3: France Energy Consumption (SA, Jan. 2020 = 100)

Source: Refinitiv

But as restrictions have been lifted, consumption has recovered and is now back to roughly where it was pre-crisis. Chart 3 shows this for the case of France, but it is true of nearly all other countries as well.

Looking ahead, moves towards more homeworking and less international business travel are likely to become entrenched, with negative implications for fuel and energy demand. What’s more, governments providing fiscal stimulus to bolster economic growth in the wake of the virus may seize the opportunity to promote clean energy at the same time.

That said, although the economic recovery from the crisis is likely to be long and difficult, global GDP should be back above its pre-pandemic level by mid-2021. Over the long term, many economies should be able to more or less revert to the path of output they were on before the crisis. The upshot is that COVID-19 is unlikely to have significantly altered the likely trajectory of global carbon emissions.

1) More frequent natural disasters

There are a number of channels through which climate change will affect EMs. The first is through rising sea levels and more frequent natural disasters. Chart 4 shows the number of people who currently live below the annual flood level, which is to say areas that you’d expect to be flooded at least once a year, compared with what happens by 2050 under the 3°C warming scenario. This number is expected to increase from around 250m today to 300m by 2050, with most of these people in Emerging Asia. (See Chart 4.)

Of course, the effects of flooding can be mitigated through investments. Much of the Netherlands would already be subject to frequent flooding were it not for the expensive flood defence systems that were introduced in the 20th century. The country spends over US$100 per person per year on flood defences. As one of the richest countries in the world, this is easily affordable.

Chart 4: Population Below Annual Flood Level (mn)

Sources: Refinitiv, Capital Economics

In contrast, Bangladesh is one of the poorest countries in the world and has far fewer resources to spend on flood defences. Per capita GDP is just US$2,000. A devastating flood there in 2007 made 9m people homeless and led to the deaths of 1,000.

The COVID-19 pandemic will make matters worse. The crisis will leave behind it a legacy of much higher government debt. (See Chart 5.) Some EMs will need to revert to austerity over the coming years to put their debt levels on a more sustainable trajectory, reducing the resources they have to fund climate mitigation strategies.

Chart 5: Government Debt (% of GDP)

Source: IMF

In addition to increased floods, climate change is likely to lead to more frequent and serious natural disasters, including cyclonic storms like hurricanes. 

These storms only form over water above a minimum temperature. Warming seas will therefore widen the area at risk. This is already happening – the number of storms in the US whose damage is estimated at a billion dollars or more has increased by 50% since the 1980s. 

Storms, floods, and other disasters can lead to significant short-term economic disruption. Chart 6 shows Thai manufacturing output. The period in 2011 when the country experienced its worst-ever floods has been highlighted. These floods caused production in many places to shut down, resulting in disruptions to supply chains that fanned out across Asia. Similar events will likely become more common across the emerging world as global temperatures continue to increase.

Chart 6: Thai Manufacturing GVA (Index, 100 = 2000)

Sources: Refinitiv, Capital Economics

Although Thai industrial production rebounded quickly in subsequent months, the costs of rebuilding were estimated at around 3% of GDP. This is money that could otherwise been spent investing in new infrastructure, education and other public goods that could boost long-run development.

2) Costs of energy transition

Climate change will also have an impact on many EMs as a result of the policy responses adopted to mitigate it, particularly in the advanced economies.

These changes will be most pronounced when it comes to the energy sector. A combination of consumer preferences, new technologies and changes in government policy will almost certainly prompt an accelerating shift away from fossil fuels, which will lead to a drop in prices. Sceptics have long claimed that this transition will burden EMs with new costs, but this is based on the false assumption that greener forms of power are always costlier. 

The costs of generating electricity vary significantly across different EMs, but figures for China show how the cost of solar and wind power has fallen sharply in recent years. (See Chart 7.) Both are now cheaper than imported gas. Within a few years, they’re likely to be cheaper than coal. This process is happening across the EM world, albeit at different speeds. We think that the shift away from oil will be driven by market forces as much as legal requirements.

Chart 7: Energy Costs in China (US$/MWh)

Sources: Refinitiv, Capital Economics

Reduced demand for oil and gas will, of course, hurt some EMs. But the costs will be unevenly distributed. Chart 8 divides emerging markets into net oil exporters and net importers. Net oil importers generate about 80% of EM GDP. China by itself makes up a larger share of EM GDP than all net oil exporters combined.

Chart 8: EM GDP (% of total)

Sources: Refinitiv, Capital Economics

So moving to a world in which fuel is generated domestically, rather than imported, would actually benefit many EMs. Even among oil-exporting EMs, the costs will not be shared equally.  

Chart 9 shows oil production costs in a variety of EMs. Lower oil prices will weigh on high cost producers, like Brazil. The Gulf states, which all have much lower costs, would not be as badly affected. Indeed, after falling for years, we think that OPEC’s share of global oil output will rise.

Chart 9: Oil Production Costs (US$ per barrel, latest)

Sources: Statista, Capital Economics

3) Damage to tourism sectors

COVID-19 has dealt a hammer blow to the global tourism industry. But the sector should make a recovery once a vaccination becomes readily available. Further ahead, higher temperatures and policy changes could have a profound impact. Higher carbon taxes would make flying more expensive, which could reduce the overall size of the tourism industry.

There would be redistributive effects too as holiday makers shunned hotter places in favour of cooler countries. For example, Thailand, where the tourism industry was worth around 20% of GDP before the current crisis (see Chart 10) and where the average daily temperature is currently around 30°C, could be less appealing. Countries that are currently cooler, such as those in Eastern Europe and North East Asia, could benefit.

Chart 10: Tourism (% of GDP, 2019)

Sources: World Bank, Capital Economics, Refinitiv

4) Increased immigration

Climate change is likely to lead to increased migration. Chart 11 shows the World Bank’s estimates of additional migration in three regions under an optimistic and a pessimistic climate change outcome. As you can see, they are estimating that an additional 70m people in Africa move. The majority of this movement will be, like most migration, within regions or countries.

Chart 11: Climate-Induced Migrants by 2050 (mn)

Sources: World Bank, Capital Economics

Immigration of this scale would likely lead to significant disruption for many countries, which would struggle to absorb large volumes of migrants. But widespread migration would also benefit states with the will and ability to welcome and integrate new workers, especially because migrants tend to be younger and better educated than the peers they leave behind. The potential gain is largest for countries with declining workforces, such as parts of East Asia and Eastern Europe

5) Falling labour productivity

The final channel to consider is the impact on productivity caused by warmer temperatures, particularly in equatorial countries.  Chart 12 shows the World Bank’s estimate of the change in labour productivity in the agricultural sector and the service sector in a variety of EMs if average global temperatures rose by 3°C above the pre-industrial average. 

Chart 12: Change in Labour Productivity Following 3°C Rise in Temperature (%)

Sources: World Bank, Capital Economics

There are two key conclusions to draw. First, there is a much bigger effect on agricultural workers, because they tend to be outdoors. Second, there is also a significantly disproportionate effect on warmer countries. 

In a country like Poland, no real change is expected. In West Africa and parts of Asia, however, labour productivity is expected to fall by 20% or more in the agricultural sector compared with the baseline scenario of no further rise in global temperatures. 

Improved farming technology helped many EMs increase their food output in the late 20th century. (See Chart 13.) However, climate change and rising populations will make it harder to achieve another “green revolution”.

Chart 13: Wheat Yields (Index, 100 = 1970)

Sources: Refinitiv, Capital Economics

Measuring the economic fallout

Given this uncertainty, there is wide a range of possible economic outcomes. Chart 14 shows the estimated economic costs for given increases in global temperature. The estimates come from academic sources and international institutions. 

Chart 14: Estimated Effect on Global GDP

Sources: Refinitiv, Capital Economics, World Bank

There is a spread, but there is also a general consensus that anything over a very marginal increase will harm the economy. The figures used in the next section of this Focus are mostly based on the black dot, which is from a World Bank report which modelled a rise in global temperatures of 3°C by 2100.

The World Bank’s estimates show that the impact will vary significantly by country. In the worst-hit countries, which are likely to be in Africa as well as South and South East Asia, real GDP could be around 10% smaller than would otherwise be the case. Countries in Eastern Europe should experience very little impact. (See Chart 15.) In general, EMs will be hit much harder than the developed world.

Chart 15: Effect on Real GDP of 3°C Rise in Global Temp. From Current Temperatures by 2100 (%)

Sources: Refinitiv, Capital Economics

It is important to note that the most vulnerable countries are generally relatively fast-growing countries. So the effects of global warming won’t alter the fact that GDP in a few decades’ time will still be many times bigger than it is now.

Chart 16: Nigeria Real GDP (2020=100)

Sources: World Bank, Capital Economics

Take Nigeria, whose economy, according to the World Bank, will be one of the worst affected. The blue line in Chart 16 shows our long-run forecast for real GDP before the effects of climate change. Suppose that global warming knocked 10% off GDP by 2050 (as shown by the black line), the economy in 2050 would still be over four times the size it is now; just not as big as it could otherwise have been.

It is important to note that the World Bank’s forecasts do not take account of any adaption that developing countries may undertake. Richer emerging economies would be able to partly cushion the blow by investing more in flood defences and so on.

Chart 17 compares the World Bank’s estimate of the change in potential GDP as a result of a 3°C increase in global temperatures. The countries at the left face the smallest drop in GDP – or even a marginal rise – while those on the right face the biggest fall. 

Chart 17: Effect of 3°C Increase in Temperature

Sources: World Bank, Capital Economics

The vertical axis shows a measure of how resilient EMs are to climate-related shocks. More resilient societies are at the top. The resilience score is based on how able a country is to leverage the public and private sector to invest in climate mitigation strategies.

A key trend that stands out is that the chart slopes from top left to bottom right. That is to say, the countries that are most resilient face the smallest shock, and the countries that are most fragile (mostly because they are poor or badly governed) face the biggest one. The two key exceptions are Hong Kong and Singapore. Although these places are highly vulnerable to climate change, they are also wealthy enough to be able to offset the damage. In contrast, many countries in Africa are not only highly vulnerable to rising global temperatures, but also lack the resources to offset the damage it will cause. Many of the world’s richest countries have pledged more money to help the developing world adapt to climate change, but so far the funds have been underwhelming.

Slower convergence

One of the key implications of all this is that the process of income convergence between countries will be slower. With the greatest cost falling on the poorest countries, climate change will add to the headwinds facing low-income countries.

This only strengthens our long-standing view that the “golden age” of convergence that we saw after the turn of the century, during which emerging economies almost all grew faster than developed markets, is over. (See Chart 18.)

Chart 18: GDP (% y/y)

Sources: Refinitiv, Capital Economics

Some beneficiaries

But it isn’t all doom and gloom. Some economies will benefit. One group of winners will be commodity producers that are able to provide goods needed for the energy transition. Copper producers such as Chile and Peru, for instance, will benefit since the metal is needed for electric cars. Electric cars use approximately four times as much copper as
conventional cars and copper is also heavily used in electric vehicle charging stations. Meanwhile, if food production is disrupted in equatorial countries, then producers in Eastern Europe and Latin America might find new export markets.


Gareth Leather, Senior Asia Economist, gareth.leather@capitaleconomics.com