Confronting the Economic Effects of Climate Change in Latin America and the Caribbean
With the last seven years registering the hottest temperatures in recorded history, Latin America and the Caribbean not only faces the direct effects of climate change; it confronts a host of indirect economic effects potentially made worse by development challenges, including low economic growth, high poverty, inequality, and fiscal vulnerabilities
By Eduardo Cavallo - Bridget Hoffmann
Latin America and the Caribbean.
Cartography by Jeff Wandersen
With that in mind, the Red de Centros, a decades-old IDB initiative to fund research papers from the region, recently commissioned and published a series of studies on the economic impacts of our warming planet, ranging from the impact of drought on indigenous women in Chile, to the effect of weather disasters on trade, and the inequalities of adaptation. Those articles, published recently with others on the topic in the journal Economics of Disasters and Climate Change, seek to deepen knowledge and inform solutions in the midst of our historically unprecedented change in weather.
The studies and the broader literature on climate change offer new evidence of the wide sweep of a changing climate’s impacts. Intensified warming is affecting and will continue to affect economic growth, trade, and human capital. It could also have negative impacts on inequality, both between countries and regions and between citizens inside national borders.
One grave concern is the impact on the poor, who are especially exposed to climate risks. They lose a greater share of their wealth when disasters hit, have less access to financial resources to confront climate-related emergencies, and fewer insurance mechanisms available to them. Indeed, they suffer from both the short- and long-term effects of climate change. A study of household electricity consumption in Colombia by Shaun McRae, for example, shows how wealthier households use air conditioning to a significantly greater extent to cope with higher temperatures than poor ones. While electricity consumption by lower-income families more than doubled in the country between 2011 and 2019 and the gap in the use of air conditioners is narrowing, significant disparities remain in the ownership and use of them between low and high-income households in hot regions of Colombia. Many households remain unprotected.
A study by Rodrigo Pérez, Mayarí Castillo, and Chiari Cazzuffi reveals another dimension of these inequalities: how indigenous women in Chile have been harmed by one of the most prolonged droughts in the country’s history. Not only have they been unable to reap as much from their small agricultural plots. They also must dedicate more of their time to unpaid activities such as buying water, fetching water from distant rivers for household chores, and going to the rivers to bathe and wash. As a result, they face a larger decrease in income compared to other groups, a reality exacerbated by long-standing economic and social vulnerabilities which make it difficult for them to emigrate to more hospitable climes.
Inequalities between geographic regions also come into play. A paper by Preeya Mohan reveals the particular vulnerabilities of Eastern Caribbean island states to the intensifying tropical storms of climate change, compared to other regions, given their high dependence on international trade. A 20% fall in their exports in the month following such a storm and up to three months after, she finds, can reduce income, employment and tax revenues to fund post-disaster recovery.
There is little doubt that the low and middle-income countries of Latin America and the Caribbean as a whole will be disproportionately harmed by climate change. A recent study, for example, finds that low- and middle-income countries suffer an average loss of between 2.1 and 3.7 percentage points of GDP in the aftermath of climate-related disasters involving high human mortality, and that growth rates in later years are unable to sufficiently compensate for those losses. Moreover, poorer countries, with their less diversified economies, are less able to absorb geographically localized shocks by shifting funds and resources between sectors and regions. That is particularly the case for Caribbean island states. But it is also the case for other countries in the region.
The ramifications for countries already struggling with fiscal deficits and debt will be significant. The average fiscal costs of extreme weather events in the region was between 0.2% and 0.3% of GDP for the 2001-2019 period, more than 10% of the average fiscal deficit (2.6%) in those years. Some alternative financing tools available include reserve funds (which imply saving to build up a reserve), contingency credit lines (for example, the IDB’s Contingent Credit Facility for Natural Disasters – CCF), regional risk pools (like the Caribbean Catastrophic Risk Insurance Facility – CCRIF), or catastrophic insurance. These instruments could potentially alleviate short-term fiscal pressures, such as those created after a hurricane. But more research has to be done to really determine their potential fiscal impact.
Latin America and the Caribbean face immense challenges as the economic impacts of climate change take deeper root. From negative effects on growth and poverty to those on inequality and fiscal stability, the region is entering a new era where climate change will assume an ever more prominent role in its destiny, compelling policymakers and researchers to redouble their efforts to find resilient, equitable and sustainable strategies to alleviate the harshest effects of rising temperatures and extreme weather events. The contribution of Red de Centros and the Economics of Disasters and Climate Change journal are important stepping stones along this journey — one that we still have a long way to travel.
