An Introduction to the Emerging Climate-Economy System

Looking at past trends, one may conclude that global CO2 emissions and economic growth indicate a highly positive correlation. The reason for this is of course that most CO2 emissions are being produced by fossil fuel combustion. Kellie-Smith and Cox (2011) however, assert that there may be a limit to which these two variables have a positive correlation. Damages due to the subsequent effects of fossil fuel exhaustion – I’m referring to global warming, in case you hadn’t guessed – may in fact now begin to hinder economic growth. Thus, it is even possible that CO2 emissions and economic growth will flip from a positive to a negative correlation.

After some rather lengthy mathematical derivations, Kellie-Smith and Cox, arrive at a complex set of formulae, which predict the critical rates of global CO2 emissions growth that will induce dampened or long-term boom-bust oscillations in human wealth. They assert that presently, at the climate-economy system’s climate equilibrium state, economic growth rates are counteracted by the impacts of climate change on the economy. In this climate state, economic growth rate = rate of decarbonisation. Due to this, it is essential to mitigate to ensure long-term sustainable growth. However, Kellie-Smith and Cox find that decarbonisation may not be enough to mitigate these effects. Conclusively, they argue that more effort needs to be invested in not only mitigation, but also adaptation and perhaps lower but more sustainable rates of economic growth.

So… what affects economic growth? Well, it depends.

Firstly how do we measure economic growth? For the purpose of the rest of the blog, let’s assume the measure is GDP/capita at Purchasing Power Parity (PPP). The reason I choose GDP/capita at PPP is simply because I wish to measure average incomes. Although inequalities and extremities will not be accounted for, this measure will provide some insight into how much the average consumer earns in a country, and thus, how much the average consumer spends relative to the prices of goods in their country; this then contributes to economic growth.

Secondly, there are just so many variables that could affect economic growth including:

• Demand & Supply of all markets and industries
• Interest rates, investment & savings
• Business and consumer confidence
• Government spending, regime and structure – corruption?
• War, Famine, Disease, Drought, Natural Hazards
• Trade openness
• Infrastructural & other development
• Post-colonial power relations
• Access to healthcare, sanitation

When there are so many compounding factors affecting economic growth, I think it is fair to say that it may be incredibly hard to predict future global growth rates. We would have to first assess the magnitude of each variable’s effect on economic growth in different countries, and then further assign weights to countries for how much they could potentially contribute to global economic growth. However, there are some variables, which are quite clearly very important predictors of economic growth, such as aggregate demand. Next post, we shall look at the future of such predictors and what they imply for the future of economic growth.