Climate Change and Developing Countries in 2050


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This paper forecasts the GDP at PPP per capita in several countries and the effects climate change will have on them.

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Climate Change and Developing Countries in 2050

  1. 1. Climate Change and Developing Countries in 2050 Will the citizens of present day developing countries be able to retain their wealth? David Manukjan 10/17/2013
  2. 2. 1 Introduction to Climate Change and Its Effects on the Future Climate change is inevitable; the only uncertainty is how severe its impacts will be. It is widely accepted in the scientific community that in order to prevent the very worst impacts of climate change, the increase in global temperature by 2050 should be below 2 degrees Celsius. If global temperatures increase by more than 2°C, the effects compound and become even worse. Since the year 2000, worldwide carbon dioxide concentrations have decreased by approximately 0.8% per year. However, to achieve the 2°C target by 2050, carbon dioxide concentrations would have to be cut by 5.1% every year (Johnson, 2012). Even if this rate were achievable in the future, it is unreasonable to expect it to be achieved in the short term, meaning that the reduction in carbon in later years would need to be far greater than 5.1% in order to achieve the 2°C target. However, governments’ ambitions to limit global warming to 2°C seem highly unrealistic, and I believe that an increase in global temperatures between 2.5 and 4°C by the year 2050 seems most likely, with 6°C and above a pessimistic, yet still plausible, scenario. Figure 1 shows the estimated global temperature increases that will occur for different average annual rates of decarburization to the year 2050. A ―business as usual‖ approach to global warming, where the world continues to decarbonize at the current 0.8 rate, would result in a 6°C increase in global temperatures. An annual decarburization rate of 2.9% would lead to a 4°C increase in temperatures. This ―gradual greening‖ scenario would require energy intensity improvements in the short term of twice the average rate since 2000, for China and India to significantly shift from coal to natural gas, and for renewable fuels to be used worldwide by 2050. Past studies predict that this kind of program should not reduce global GDP in 2050 by more than 2-3% of GDP, but would require a much greater commitment from all major economies than what has occurred in recent years (Johnson, 2012). It is important to note that while this is the most likely scenario to
  3. 3. 2 occur and is better than a 6°C rise in temperatures, it would still be highly damaging to the world, economically, socially, and politically. While most developed countries and most of the BRIC countries have had stable or declining rates in change of carbon intensity, a growing concern is now on second and third world countries that are showing signs of high economic growth rates for the future. As these countries rush to develop, more CO2 emissions will be generated as a result, making it more difficult to reduce worldwide carbon dioxide concentrations. This could possibly even lower future annual rates of global decarburization, which would in turn raise the global temperature. Figure 1: Implied concentration levels at different rates of decarburization. Source: Johnson (2012). The effects of global warming will severely risk human development. Extreme temperatures, heat waves, rainfall, and droughts are projected to increase with rising temperatures, and risks will be much higher in a 4°C warmer world compared to a 2°C warmer world (World Bank, 2012). A 4°C increase in global temperatures would raise land temperatures on average by 4 to 10°C, because the increase in overall global temperature is compounded
  4. 4. 3 rather than simply added on to current temperatures. In regions such as the Mediterranean, North Africa, the Middle East, and the Tibetan plateau, almost all summer months are likely to be warmer than the most extreme heat waves presently experienced. These heat waves would cause death, forest fires, and harvest losses. Aside from the heat risks, the increased carbon dioxide concentrations in the atmosphere would cause the world’s oceans to become more acidic. Ocean acidification would cause great harm to marine life, coral reefs, and the people that depend on them for food, income, and tourism. Climate change will become the number one cause of ecosystem damage, surpassing habitat destruction by humans. Rising sea levels are also a consequence of rising global temperatures, with a predicted rise of .3 to .8 meters in sea level by 2100 from a 2°C increase in global temperatures. This would lead to altered and severe weather patterns, endangering highly vulnerable small island states and cities in Mozambique, Madagascar, Mexico, Venezuela, India, Bangladesh, Indonesia, the Philippines, and Vietnam. Global food security will be difficult to achieve, with changing weather patterns making different parts of the world suitable for food production every decade and decreasing crop yields (Nelson, 2010). These altered climate patterns and food and water shortages would displace large populations of people (World Business Council for Sustainable Development). The comparative advantage of food production will shift towards developed countries due to changing weather patterns. Air pollution will overtake contaminated water and lack of sanitation as the prime cause of premature mortality across the globe, potentially rising to 3.6 million deaths per year—mostly in China and India (Organization for Economic Co-operation and Development, 2012). Poverty,
  5. 5. 4 nutritional deficits, water contamination, and incidences of epidemic diseases are all expected to increase, mainly in developing countries. Developing countries are geologically most affected by climate change, and their economies are most likely too sensitive to absorb the costs of climate change while maintaining high growth rates. I predict that as developing countries advance economically in the present day, they will increase global carbon levels and prevent global decarburization levels from reaching those needed to prevent severe climate change. As a result, I hypothesize that the purchasing power parity of the people in these developing countries will not increase greatly because the costs of food, clean water, and other necessities will rise due to decreased supply caused by the environmental damage from globalization. Hypothesis The citizens of the United States and other developed countries will be able to absorb the increased prices of commodities and the added costs of global warming, because they will still have a high purchasing power parity per capita in 2050. Citizens in current developing countries will not be able to adjust to these added costs because their spending power will not grow enough by 2050 to cover these added costs.
  6. 6. 5 Methodology It is difficult estimating what will happen 40 years from now, given what an unpredictable environment the world will be in 2050. However, it is possible to give an approximate estimate, which is something I will attempt to do. My calculations can be found on pages 6 and 7. I first found the twenty countries with the largest gross domestic product at purchasing power parity in 2011 (World Bank, 2011). I then found the populations for these countries in 2011 using the World Bank database, and divided the GDP at PPP by the population to find the gross domestic product at purchasing power parity per capita (World Bank, 2011). This would give a person’s average spending power relative to the United States. I then ranked the countries from greatest to lowest GDP at PPP per capita for comparison purposes. I chose to use this this method of comparison as opposed to using market exchange rates so that I could more easily compare spending power and average living standards across all twenty countries. Next, I researched and found the projected GDP at PPP forecasts for the 20 largest economies for the year 2050, estimated by PricewaterhouseCoopers (Hawksworth and Chan, 2013). I then used the World Bank’s estimates for the 2050 population to find and rank the GDP at PPP per capita (World Bank, 2011). To get a better understanding of the quality of life in the twenty countries with the largest economies, I then subtracted the 2011 poverty threshold in the United States, which for an individual is an income of $11,484 or less, from the GDP at PPP per capita for each country (United States Census Bureau, 2011). This would measure a person’s average spending capacity after meeting their basic survival needs from their annual income. Since purchasing power parity rates for each country are adjusted based on the cost of a basket of goods that typically meet basic needs, I believe that this method is applicatory, though it is a
  7. 7. 6 Figures 2 and 3: 2011 and 2050 GDP at PPP per capita calculations Country GDP at PPP ($billion) Population (thousands) GDP at PPP per capita US 15,094 309,349 $48,793 China 11,347 1,338,300 $8,479 India 4,531 1,224,615 $3,700 Japan 4,381 127,451 $34,374 Germany 3,221 81,777 $39,388 Russia 3,031 141,750 $21,383 Brazil 2,305 194,946 $11,824 France 2,303 64,895 $35,488 UK 2,287 62,232 $36,750 Italy 1,979 60,483 $32,720 Mexico 1,761 113,423 $15,526 Spain 1,512 46,071 $32,819 South Korea 1,504 48,875 $30,772 Canada 1,398 34,126 $40,966 Turkey 1,243 72,752 $17,085 Indonesia 1,131 239,870 $4,715 Australia 893 22,299 $40,047 Poland 813 38,184 $21,292 Argentina 720 40,412 $17,816 Saudi Arabia 686 27,448 $24,993 2011 Country Projected GDP at PPP ($billion) Population (thousands) GDP at PPP per capita China 53,856 1,273,054 $42,305 US 37,998 397,979 $95,477 India 34,704 1,684,197 $20,606 Brazil 8,825 218,655 $40,360 Japan 8,065 105,680 $76,315 Russia 8,013 124,280 $64,475 Mexico 7,409 142,253 $52,083 Indonesia 6,346 289,452 $21,924 Germany 5,822 71,992 $80,870 France 5,714 73,225 $78,033 UK 5,598 71,484 $78,311 Turkey 5,032 91,088 $55,243 Nigeria 3,964 388,428 $10,205 Italy 3,867 58,779 $65,789 Spain 3,612 51,452 $70,201 Canada 3,549 43,613 $81,375 South Korea 3,545 46,411 $76,383 Saudi Arabia 3,090 43,160 $71,594 Vietnam 2,715 101,377 $26,781 Argentina 2,620 50,003 $52,397 2050
  8. 8. 7 Figures 4 and 5: 2011 and 2050 GDP at PPP per capita over Poverty Threshold Calculations Country GDP at PPP per capita GDP at PPP per capita over Poverty Threshold US $48,793 $37,309 Canada $40,966 $29,482 Australia $40,047 $28,563 Germany $39,388 $27,904 UK $36,750 $25,266 France $35,488 $24,004 Japan $34,374 $22,890 Spain $32,819 $21,335 Italy $32,720 $21,236 South Korea $30,772 $19,288 Saudi Arabia $24,993 $13,509 Russia $21,383 $9,899 Poland $21,292 $9,808 Argentina $17,816 $6,332 Turkey $17,085 $5,601 Mexico $15,526 $4,042 Brazil $11,824 $340 China $8,479 -$3,005 Indonesia $4,715 -$6,769 India $3,700 -$7,784 2011
  9. 9. 8 rough comparison since levels of poverty are measured differently abroad. The reason some countries have negative GDP at PPP per capita over the Poverty Threshold values is because large parts of the populations of those countries are unable to meet their basic needs, and starvation and malnutrition are still common there. I then attempted to replicate the same comparison, but for the year 2050. I already had the GDP at PPP per capita calculated, but after researching, I found no estimated values for the estimated poverty threshold in 2050. However, I recognized that the poverty threshold was adjusted yearly for inflation from the change in the consumer price index of urban customers (Bureau of Labor Statistics, 2013). Thus, I used the 2011 poverty threshold in the United States of $11,484 as the present value, and discounted it at the forecasted annual inflation rates of the CPI-U index until the year 2022, which were provided by the Congressional Budget Office (Congressional Budget Office, 2012). This would lead me to the future value of the poverty threshold in 2022, $14,909.50. From there, I had to estimate my own inflation rates in order to forecast the poverty threshold in 2050. For years 2022 – 2025, I used an annual 2.8% inflation rate, for 2025-2035 a 3.3% rate, for 2035-2045 a 4% rate, and for 2046-2050 a 4.5% rate. A summary of these rates can be seen in Figure 6. After discounting at these rates, I found the future value of the poverty threshold in 2050 to be $41,339.
  10. 10. 9 Figure 6: Summary of inflation rates used in predicting 2050 poverty threshold Source: Congressional Budget Office 2012 and author’s estimates I chose to steadily increase the inflation rate until 2050 to account for rising food and energy costs as the effects of climate change worsen. Real food prices are expected to almost double by the year 2050, even of basic food staples as shown in Figure 7 (Nelson, 2010). I believe that the inflation rates I’ve used are realistic and possibly even a conservative estimate, considering that mean annual inflation rate since the government began recording these values in 1913 was 3.33%. Using the average annual inflation rate since 1913 to find the future value of 2050 from the 2022 present value, I found that the future value in 2050 would be $37,403.19, which is only $3935.86 lower than my own estimate. Rates used in Calculations 2011 = 3.2% 2012 = 2.1% 2013 = 1.5% 2014 = 1.6% 2015 = 2.0% 2016 = 2.2% 2017 = 2.3% 2018 = 2.3% 2019 = 2.3% 2020 = 2.3% 2021 = 2.3% 2022 = 2.3% 2022 - 2025 = 2.8% each year 2025-2035 = 3.3% each year 2035 -2045=4.0% each year 2046-2050 = 4.5% each year
  11. 11. 10 Figure 7: Forecasted percentage real price increases from 2010 to 2050 of basic food commodities Source: Nelson (2010). The next section speaks about what the future will be like in countries with negative or low values for GDP at PPP per capita over the poverty threshold in 2050. Findings: Climate change offsets some of the benefits of income growth My research shows that climate change offsets some of the benefits of income growth due to high inflation and rising real costs. I believe that in the year 2050, investment in countries with negative values for GDP at PPP per capita over the poverty threshold will be risky investments. Countries with negative values for GDP at PPP per capita over the poverty threshold will have difficulties protecting citizens from the effects of climate change and may have to increase investment in social safety nets, and some of those countries harder hit by climate change will have lower GDP at PPP per capita in 2050 than they do in 2013. Some of the 6°C 3-4°C >6°C 2050 Global Temperature Increase
  12. 12. 11 current N-11 countries will still have wealthier citizens on average than some of the current BRIC countries in 2050, though the BRIC countries will have higher overall GDPs. My calculations do not include the damages of global warming, which for the year 2050 are estimated to be $558.57 billion dollars for the United States, or about 1.47% of GDP (Ackerman and Stanton, 2008). I did not include theses costs when comparing the country’s citizens’ ability to maintain a quality of life above poverty, because global warming damages would vary greatly depending on the country, and data was not available for most of them. Thus it can be expected that spending potential will be even lower. From the countries with negative values for GDP at PPP per capita in 2011, China was the only country to get a positive value for 2050. Brazil actually dropped from +$340 to -978. It seems like the average spending potential of citizens in most of the currently developing countries will not rise fast enough to improve their quality of life by 2050’s standards, while countries whose GDP at PPP per capita are currently above the poverty threshold will continue to thrive and grow with the exception of Australia (which is due to heat waves, other severe weather effects, and a decline in population). I believe that this is because the economies currently doing well economically have a technological, capital, and educational advantage that developing countries will not be able to catch up to in time before inflation, food prices, and costs from global warming begin to rise. When these changes start, the people in the developing countries will still have a higher purchasing power parity per capita than they do in the present day. However, citizens in current developing countries will not be able to adjust to these added costs because their spending power
  13. 13. 12 will not grow enough by 2050 to cover these added costs. Thus, my findings support my hypothesis. Planning for the Future Climate change will increase the risks associated with foreign direct investment in low or negative GDP at PPP per capita over the poverty threshold countries, because of their lower capacity of absorbing the costs associated with climate change. Investors may want to choose instead to invest in countries with medium-to-low positive GDP at PPP per capita over the poverty threshold countries or in regions where climate risk is not as high, depending on their tolerance for risk. Any investment in long-term assets or infrastructure, particularly in coastal or low-lying regions, needs to be prepared for damages. Governments should consider providing incentives to attract citizens away from high risk regions to inland locations and higher altitudes so that money in the present day is not wasted on infrastructure or protection that might ultimately be destroyed, abandoned, or ineffective. It is important that the people who become displaced by climate change will have somewhere to go, and won’t be starting off with nothing. Additionally, citizens should save for their own retirement and decrease their reliance on government programs, because the likelihood of countries being fully prepared for a future of global warming is low. All countries need to strengthen their food, water, and energy supply chains. It is possible that the worse the effects of climate change become, the more protectionist developed countries will become, despite the fact that due to the severe weather changes international trade of food will need to increase significantly in order to feed the world population. The production of food
  14. 14. 13 in developed countries generally benefits from climate change, compensating for declines in developing nations (Nelson, 2010). Carbon intensive industries need to anticipate more invasive regulation and plan accordingly and begin considering their options for alternate sources of energy. By 2050, there will be an increase between 8.5 and 10.3 percent in the number of malnourished children in all developing countries (Nelson, 2010). The only way to avoid terrible effects of climate change is for there to be radical transformations in the ways the global economy currently functions: rapid uptake of renewable energy, sharp falls in fossil fuel use, removal of industrial emissions and halting deforestation. Clearly the world is currently not on this path. How many ways are there to say the world is heading for hard times? As citizens, we must push for more aggressive climate policy, both at a national and international level. As investors, we must begin to monitor effects of climate change and begin considering them when we evaluate risk.
  15. 15. 14 Sources Johnson, L., Glendhill, R., Grant, J., and Low, L. (2012). Too late for two degrees? Low Carbon Economy Index 2012, Retrieved February 20, 2013: World Bank. (2012). Turn Down the Heat: Why a 4°C Warmer World Must Be Avoided, Retrieved February 22, 2013: centrigrade _warmer_world_must_be_avoided.pdf Nelson, G., Rosegrant, M., Palazzo, A., Gray, I., Ingersoll, C., Robertson, R., Tokgoz, S., Zhu, T., Sulser, T., Ringler, C., Msangi, S., and You, L. (2010). Food Security, Farming, and Climate Change to 2050: Scenarios, Results, Policy Options, Retrieved February 22, 2013: publications/rr172.pdf World Business Council for Sustainable Development. Vision 2050: The New Agenda for Business, Retrieved February 22, 2013: contextkey=true Organization for Economic Co-operation and Development. (2012). OECD Environmental Outlook to 2050: The Consequences of Inaction, Retrieved March 6, 2013: Management/oecd/environment/oecd-environmental-outlook-to-2050_9789264122246-en
  16. 16. 15 World Bank. (2011). Gross Domestic Product 2011, PPP, Retrieved March 6, 2013: databank/download/GDP_PPP.pdf World Bank. (2011). 2010 – 2050 Total Population, Retrieved March 6, 2013: EXTHNPSTATS/Resources/Popprojectiontotal.xlsx Hawksworth, J., Chan, D. (2013). World in 2050. The BRICs and beyond: prospects, challenges and opportunities, Retrieved March 7, 2013: january-2013.pdf United States Census Bureau. (2011). 2011 Poverty Thresholds by Size of Family and Number of Children, Retrieved March 7, 2013: Bureau of Labor Statistics. (2013). Current Price Topics and Trends, Retrieved March 9, 2013: opub/focus/volume1_number3/cpi_1_3.htm Congressional Budget Office (2012). Economic Baseline Release, Retrieved March 19, 2013: sites/default/files/cbofiles/attachments/Jan2012_EconomicBaseline_Release.xls Ackerman, F. and Stanton, E. (2008). The Cost of Climate Change: What We’ll Pay If Global Warming Continues Unchecked, Retrieved March 20. 2013: