Tuesday, July 10, 2018

Economics and Climate Change

Cover of the Report
     In our modern times, we are blessed and cursed by 24/7 news reporting. On the blessed side, we are quickly aware of happenings anywhere in the globe. We can follow the plight of the boys and their soccer coach trapped in a cave in Thailand. It was full of drama and then joy when all were saved. On the cursed side, we can be bombarded with news of things we cannot do anything about like climate change. These things can weigh on us and influence our general mood depending on the amount of reporting.
    To say the least, the notion of climate change or global warming has been controversial. There seems to be three general camps:
  1. Some people, for some reason on the liberal side of the political spectrum or environmentalists, believe that climate change is real, it is our fault, it is a serious threat to mankind and the planet, and we have to do something about it now.
  2. Others, who seem to be on the conservative and pro-business side of things, believe climate change is pseudo-science and we have to discredit those that are advocating it as charlatans.
  3. Lastly, and probably the majority of people, have heard about climate change but are ambivalent and simply trying to live their lives.
      On the morning of the 4th of July, I was listening to NPR. When the Marketplace segment came on, I heard this report.
Pricing and Climate Change form NPR’s Marketplace on July 4, 2018. 
Sabri Ben-Achour: When investors decide whether to buy a country’s bonds, they consider a lot of things inflation, interest rates, whether the country will pay them back. Bond investors are now considering something else: climate change. Countries that are particularly vulnerable to climate change are paying significantly more to borrow from the financial markets as investors price in environmental risk. 
Vivian Noonan, BBC: We have known for a long time that climate change will have economic costs. But a study co-authored by Charles Donovan of the Imperial College in London finds that countries most effected by climate change have been hit with a double whammy: the increased cost caused by abnormal weather events and higher priced debt. 
Charles Donovan: So a country like Kenya which would be suffering maybe not from such dramatic things like hurricanes but something very long lived like drought which begins to effect agricultural production which then begins to effect exports and ultimately has an impact on the country’s bottom line. These are the kinds of things that we see that are deteriorating the ratings of these countries with regards to their international standing and ultimately has them having to pay higher interest costs. 
What is need is to have the international community to think about risk mitigation that can help pool these risks in a way that we can avoid some of these impacts. 
Vivian Noonan: If that doesn’t happen, Dr. Donovan says countries vulnerable to climate change could pay an extra $170B in interest rates over the next decade.
     This report impressed me. The financial world, which I can safely say is on the conservative pro-business side of things, has basically recognized some countries’ economies have been impacted by changes in climate and their bond rates, their cost of capital, has increased because of it. Financial markets react, over the long-term, on supply and demand, productivity, and other factors. They do not react to rhetoric.
     If the climate in coffee producing country has changed to the point where coffee
becomes a less productive crop or has to move to higher elevations for optimal growing temperatures, the economy of that country could suffer as they transition to other goods. Whether you believe in climate change or not, the bond rates of certain countries are reacting to something. There are studies and projections that this is indeed happening in Brazil, Colombia, and Central America to name a few coffee growing regions. The Climate Change Institute in Australia published a study in 2016 titled A Brewing Storm: The climate change risks to coffee. This study has stated that “Climate change is projected to cut the global area suitable for coffee production by as much as 50% by 2050.” 

From A Brewing Storm:  The climate change risks to coffee
     Coffee and cocoa seem particularly susceptible to climate change. Also in 2016, The National Oceanic and Atmospheric Administration within the US Department of Commerce reported on Climate and Chocolate. The report that the Marketplace reported on and of which Charles Donovan is a co-author is Climate Change and the Cost of Capital in Developing Countries
From Climate and Chocolate

   All three reports are well done. All have projections to 2050 which assume that current trends will continue. That may or may not be the case. Scientists may develop coffee and cocoa varieties that are less reactive to climate change. Will they be successful? If they are successful, will the coffee and chocolate taste the same? Or will prices sky rocket as supply diminishes? We shall see.

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