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City Wakes up to Economic Threat of Global Warming

Richard Wachman

In 1798 Thomas Malthus forecast that a huge increase in population would outpace food production by the mid-19th century, leading to a catastrophic famine. He was wrong. Malthus could yet be proved right, though not in the way he envisaged.

Today, scientists worry that global warming will lead to the sort of disaster Malthus predicted. If average temperatures keep rising, drought could devastate arable areas in developing countries where population growth is most pronounced, leading to widespread starvation. If the earth gets hotter, the polar ice caps will melt, causing sea levels to rise. The result will be floods that disrupt food production, and threaten life itself. 0506 13

It may sound like a scene from a Hollywood disaster movie, but sober-headed City economists are beginning to publish reports that look at the implications of climate change as 'extreme weather events' become more commonplace.

A paper by Roger Brown, chief economic strategist at investment bank UBS, points out: 'The recent acceleration of inflationary pressure reflects a rise in food prices caused by a weather-induced global reduction in supply.' He says that 'a cursory glance at different countries shows that there has been a pronounced acceleration in food price inflation since mid-2006. Agricultural production may not continue to increase as rapidly as it has in the past while, at the same time, population growth accelerates, putting staple food prices under pressure.'

Brown adds that less developed regions are likely to show the most rapid rise in population, as well as the largest drops in agricultural production. 'The Asian and African river deltas are anticipated to be the areas most severely impacted by flooding.'

The effect of global warming appears to be with us already. There has been an exceptionally warm spring in Europe - Britain and Holland have had their warmest April on record. It raises the spectre of drought unless more rain falls. The consequences could be water-rationing and the threat of blackouts, as demand for air-conditioning and refrigeration soars in the summer, disrupting economic activity and potentially costing business millions.

While we could see a jump in inflation if fruit and vegetable harvests fail, a further point is that converting food crops to 'clean' fuel - ethanol and biodiesel - is pushing up the price of maize.

The short-term effect of higher food prices on the economy may be difficult to gauge but the big question is what happens in the longer term. The issue exploded into the open last October when UK economist Sir Nicholas Stern claimed that global warming could shrink the world economy by 20 per cent by the end of the century if nothing was done, but that action today would cost just 1 per cent of GDP. He recommended a package of measures such as green taxes, a worldwide carbon trading emissions scheme, energy efficiency and halting deforestation to cut greenhouse gases. He also said the development of new green technology would offer significant compensation for business and that over £1trn of savings could be made if an international agreement was reached that caps greenhouse emissions at levels forecast for 2035.

John Llewellyn, senior economic policy adviser at Lehman Brothers, recently produced a report entitled The Business of Climate Change in which he argued that there was now a consensus that global warming would have far-reaching economic consequences. Llewellyn says: 'Global warming, we judge, is likely to prove one of those tectonic forces that - like globalisation or the ageing of populations - gradually but powerfully changes the economic landscape in which our clients operate, and one that causes periodic sharp movements in asset prices.'

In Britain, business organisations acknowledge that the debate has become mainstream. Michael Roberts, director of business and the environment at the CBI, says: 'We don't challenge the consensus that man-made greenhouse emissions have played a role in bringing about climate change.' Nor does he ignore fears of future armed conflict over the scarcity of natural resources such as water. 'It is not something we dismiss lightly. Geopolitical events affect the global economy and threaten the prosperity that most of us in the West take for granted.'

Guardian Unlimited © Guardian News and Media Limited 2007

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