The Globalization of Climate Change: Amplification of Climate-Related Physical Risks Through Input-Output Linkages
35 Pages Posted: 20 May 2024
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The Globalization of Climate Change: Amplification of Climate-Related Physical Risks Through Input-Output Linkages
The Globalization of Climate Change: Amplification of Climate-Related Physical Risks Through Input-Output Linkages
Date Written: December 18, 2023
Abstract
While global supply chains have recently gained attention in the context of the Covid-related crisis as
well as the war in Ukraine, their role in transmitting and amplifying climate-related physical risks across
countries has received surprisingly little attention. To address this shortcoming, this paper for the first
time combines country-level GDP losses due to climate-related physical risks with a global Input-Output
model. More specifically, climate-related GDP-at-risk data are used to quantify the potential direct
impact of physical risks on GDP at the country or regional level. This direct impact on GDP is then used
to shock a global Input-Output (IO) model so that the propagation of the initial shock to country-sectors
around the world becomes observable. The findings suggest that direct GDP loss estimates can severely
underestimate the ultimate impact of physical risk because trade can lead to losses that are up to 30 times
higher in the EA than what looking at the direct impacts would suggest. However, trade can also mitigate
losses if substitutability across country-sectors is possible. Future research should (i) develop more
granular, holistic, and forward-looking global physical risk data and (ii) examine more closely the role
of both partially substitutable outputs, and critical outputs that are less substitutable or not substitutable
at all, such as in the food sector.
Keywords: Supply chains, physical risk, climate change
JEL Classification: E01, Q54, Q56, F18
Suggested Citation: Suggested Citation