Climate change and global supply chains
We live in an increasingly globalised world, and many countries including the UK import a significant proportion of the goods they consume. World Trade Organisation data indicate that merchandise and commercial service exports amounted to US$21.6tn in 2012, compared to world GDP of some US$72.4tn. Moreover, semi-finished products (items used in the manufacture of other products) comprise around 50% of non-fuel exports. Therefore countries cannot think about climate-related risks purely in terms of direct impacts, but must also consider their indirect exposure: effects from climate change impacts in the rest of the world. A project at Imperial is aiming to discover more about the impact of climate change on global supply chains, initially with a specific focus on French companies.
Weather and trade in a globalised world
There is a growing body of scientific evidence that climate change is leading to sea level rise, changing weather patterns, and more frequent heat waves. However, the economic impact of this is less clear. Calculations of the costs of climate change typically involve strong assumptions about assets lost due to sea level rise and storms as well as attempts to estimate the effects on agricultural output. While there is a growing literature examining the influence of climate on economic outcomes, we still have very little evidence about the direct impact of extreme weather events on economic activity, particularly on so-called “climate-insensitive” sectors such as manufacturing and services. In this project we use historic data to estimate the costs of extreme events. This will help to shed light on the possible impacts of climate change because future extreme events, at least in the next few decades, are expected to be similar to past extreme events, although their intensity and frequency is expected to change slightly.
Clearly, more frequent occurrences of extreme weather might trigger adaptation behaviour - e.g. the installation of air conditioning, the construction of flood barriers, migration of firms and households to less risky areas etc. - which could reduce the costs of such events. Our estimates can provide guidance on the amount of investment that may be warranted in such adaptation measures.
Understanding how extreme weather events in other countries, particularly developing countries, impact the rest of the world through their exports and demand for imports, can help target the funding of aid and adaptation measures more efficiently. Furthermore, in a world of globalised production chains, there is a need for evidence to understand the role that trade and supply chains might play in mitigating or exacerbating the impact of climate change. The goal of our project is thus to examine the impact of fluctuations in global weather on the productivity of manufacturing firms.
In this work we are exploring the impact of extreme weather events and weather variation on businesses using a large sample of firm level data for France, collected between 2003 and 2011. The data includes information on each firm’s employment, turnover and productivity as well as import and export values per destination. We match this to weather data constructed from a data archive provided by the European Centre for Medium-Term Weather Forecasting (ECMWF) as well as the CRED’s (Centre for Research on the Epidemiology of Disasters) historical worldwide data on the occurrence of mass disasters such as floods, storms, droughts, heat waves and cold spells.
We use micro-econometric techniques to isolate the effect of weather events both in France and abroad on these manufacturing firms’ productivity. There are three stages of the supply chain where weather events can have an effect. These are: weather events at the firms’ production locations; weather events at the places where the firms’ raw materials are sourced; and weather events at their customers’ locations. We also investigate how the differences between firms translate into differences in their sensitivity to weather shocks.
- World Trade Organisation, International Trade Statistics 2013: http://www.wto.org/english/res_e/statis_e/its2013_e/its2013_e.pdf
- World Development Indicators database, World Bank, 17 December 2013:http://databank.worldbank.org/data/download/GDP.pdf