Climate change will shock the economy, and it could affect everything from prices to taxes

Climate change could hit the economy hard in the coming years. These are the forecasts of economists who took part in the Yle survey. Due to climate change, the predictability of the economy is sharply declining. The changes will affect both the taxation system and the availability of raw materials. Economists believe that political leaders should seriously consider the need for early action.

Until now, it was believed that the transition to a greener economic system would be smooth and smooth. Now it is likely that a natural disaster will force urgent decisions.

We have compiled a list of 11 points about what the economy can expect in the future. The list is based on the answers of Finnish economists.

1. Lack of raw materials

Climatologists predict that global warming will lead to increased rainfall in the winter months and drought in the summer. According to the Center for Economic Research (VATT), hurricanes and insect pests are likely to destroy more forests in Finland in the future as well. Drought also increases the likelihood of forest fires.

– These phenomena can also affect the availability and prices of key raw materials for the export industry, says Marita Laukkanen, Lead Scientist at VATT .

Deputy State Secretary of the Ministry of Economy and Employment Elina Pülkkänen highlights the same risk: less raw materials in the event of a bad harvest caused by climate change.

– Floods and droughts, which are specific manifestations of climate change, will have unexpected consequences for the economy through raw materials and, accordingly, prices, she says.

As domestic production declines, exports will also decline. Raw materials will have to be imported from abroad. This weakens Finland’s trade balance, i.e. balance of foreign trade.

For example, during long periods of drought, the volume of electricity generated by hydropower plants decreases. Then, you may have to rely on imported electricity.

According to the chief economist of the financial concern OP Reijo Heiskanen , extreme weather events can also have a significant impact on economic growth in the short term, if they affect on commodity prices.

2. Economic turmoil ahead

Whereas before CO2 emissions were free, today there is a charge for air pollution. More and more companies will be forced to buy quotas for greenhouse gas emissions.

With such a “production shock”, some technologies and production facilities will become unprofitable. Some machines and equipment will become completely useless.

Some of the fixed assets will have to be written off and replaced with a more sustainable alternative. Workers will have to be trained in new technologies or entirely new professions.

– The scale of the green transition is such that it will have significant economic implications. The focus of economic growth will shift towards investment as replacement industries and technologies are introduced, says Chief Economist of the City of Helsinki Mikko Kiesiläinen .

Jussi Ahokas , Chief Economist of the Association of Social and the Sostery medical sector, believes there is a “huge supply shock” ahead.

– It’s kind of a structural shock when we need to renew the way we exist on the planet. What we have produced in the past needs to be rethought, says Ahokas.

3. Prices will rise

The price of EU emission quotas has already risen sharply. If the price of emissions on the global market rises severalfold, the result could be a price shock to the global economy, similar to the oil crisis that began in 1973, writes economist Jean Pisani-Ferry in an analytical study.

– If changes are not made in time, shocks can occur, when extreme environmental events become so large-scale that something has to be done quickly, or political decisions to reduce emissions will be made in a terrible hurry, says Sanna Kurronen. Chief Economist at the EVA Business Intelligence Center.

At the same time, when climate change forces companies to invest in new technologies, the fall is reflected in prices. Consumer prices may rise, at least initially. As inflation accelerates, central banks will have to raise interest rates.

– In the short term, prices for things people are used to paying little for may rise, says Jussi Ahokas.

This summer in Europe food prices such as coffee, wine and some fruits have risen as drought, frost and mold destroyed crops in exceptional weather conditions.

Expanding emissions trading to the road industry is driving up costs for motorists.

– The transition to new types of energy causes a shortage, and at the same time, prices for some products are falling sharply due to oversupply, – notes the chief economist of Nordea Tuuli Koivu .

4 … Uneven regional development

When the price of carbon dioxide emissions rises, it can dramatically impact the production capacity and profitability of some industries. This is the opinion of a professor of working life at the University of Helsinki Vesa Vortex .

– The activities and technologies imposed on the restrictions will suffer, while their substitutes and the development of substitutes will benefit.

According to Vikhryal, this is of particular importance for the economic development of the regions, since the sectoral structures in different parts of Finland are different.

– At the level of the economy of the whole country, the effect is less, since the reactions of different industries neutralize each other, – says Vortex.

5. Tax revenues will be redistributed

Climate change will also affect taxation and allocation criteria.

– Carbon taxes and carbon tariffs are already being planned. Carbon taxes will rise. On the other hand, low-carbon investment will be supported, says Jussi Ahokas of Soste.

Carbon taxes will hit certain populations more than others.

– For example, in rural areas, oil heating costs more expensive, so tax revenues have to be redistributed in a new way, in the form of transferring funds to certain people, reflects Sanna Kurronen of EVA.

Government revenues will become more difficult when fuel tax revenues cease to flow.

“This is an important source of income for the state, so it may have to be replaced somehow,” says Tuuli Koivu from Nordea.

6. Productivity will decrease

Extreme weather events such as floods or snowstorms can prevent workers from reaching their jobs. Heat waves also affect worker productivity.

According to the UN, the effects of climate change in the workplace could lead to huge productivity losses already this decade.

– Labor productivity could decline as a result of change climate, for example, due to heat and increased morbidity. On the other hand, much depends on what adaptation measures are taken, says Marita Laukkanen from VATT.

7. Impact on the state economy

Climate measures already taken may weaken global economic growth. If no action is taken to change course, the fall could be many times greater.

Countries with several types of climate, such as China, Russia or the African continent, are at greatest risk. The economic risk is higher in the southern parts than in the northern.

According to a recent study, climate change could undermine the financial position of countries vulnerable to weather events, especially those not prepared for the effects of warming.

– In longer-term projections, climate change will be especially noticeable in many emerging economies, where, for example, agricultural conditions will worsen, says Tuuli Koivu of Nordea.

Many economists interviewed by Yle advise Finnish politicians to assess vulnerability their country.

According to the Swiss Reinsurance Company Swiss Re, Finland is one of the economies to emerge from the climate crisis with fewer losses than others. But this does not mean that Finland is immune from climate risks, stresses the economist of the Central Trade Union Association SAK Anni Marttinen .

Climate risks are associated with international trade, production chains, as well as with global migration, i.e. .e. an increasing number of climate refugees.

– Climate action can affect our own ability and the ability of the rest of the world to mitigate climate risks. If global warming is not stopped, then the climatic risks of the world’s economic giants will be noticeable in Finland as well, predicts Marttinen.

8. New set of economic indicators

According to EVA’s Sanna Kurronen, economists are already looking for new ways to account for biodiversity and the natural impact of the economy in national financial accounting.

The state of biodiversity and climate should be considered a natural asset, and Kurronen believes that its degradation should be taken into account.

– We already have indicators for climate emissions, but there are still serious gaps in indicators for habitat loss, she says.

According to the Chief Economist of the Municipal Service finance (Kuntarahoitus), the “scale, complexity and time span” of the problem is such that it will affect economic scenarios for several years and decades.

– In economic projections, the time horizon for this [climate change] is now very short, usually two to three years, says Vesala.

9. Finland’s forestry is changing

Along with other raw materials, climate change can lead to disruptions in the timber market. The Finnish forest sector has so far escaped the severe damage that has befallen many other countries.

– Long periods of heat increase the likelihood of such events, so the industry naturally thinks about how to prepare, says the chief economist of the Finnish Forest Industry Association Maarit Lindström .

Extreme events occur unexpectedly, making it difficult to account for them in short-term economic forecasts.

– Forest owners use insurance coverage more often than in the past, for example, to cover damage from storm and wind, forest fires, she says.

Climate change will also affect the structure of the economy by increasing demand for wood products. This will increase the global market for the Finnish timber industry.

On the other hand, Finnish forest owners will benefit if their forests are classified as valuable carbon stocks as the climate changes. In this case, it may be more profitable not to cut down the trees.

10. The future looks hazy

Climate change is a long-term phenomenon that is very difficult to account for in conventional economic forecasts, notes Pasi Sorjonen , chief economist at Akava Central Organization of Higher Education Workers’ Unions. However, it is important to take into account, especially in long-term forecasts.

– Obviously, long-term forecasts will continue to take climate change into account, although this will be very difficult to do, says Sorjonen.

Chief Economist, Central Union of Employees Trade Unions STTK Patrizio Laina is of the same opinion. Climate change is currently only slightly affected by short-term forecasts.

Damage caused by extreme weather events is not reflected in GDP, and its elimination is likely to boost economic growth. When houses sink into mud during a flood or landslide, it is the owners who lose their wealth. When new houses are built instead of these houses, the GDP grows.

On the contrary, the longer-term forecasts should be greatly affected by climate change. ”

– Most long-term forecasting models are still very incomplete, and climate change and its prevention are not practically reflected, for example, in the calculations of the sustainability gap of the Ministry of Finance. There is much that could be improved here, – criticizes Laina.

According to Tuuli Koivu of Nordea, climate change has so far been included in economic forecasts in a roundabout way.

– Investments in the fight against climate change, for example through the EU recovery fund, are included in our latest projections. “For example, reconstruction work in Germany after the floods will slightly increase Finland’s export demand,” Koivu says.

OP’s Reijo Heiskanen also believes that economic projections will evolve as the climate changes.

– In the longer term, we will have to consider the risks of climate change and conduct appropriate stress tests and factors impacting economic growth both positively and negatively under different scenarios, says Heiskanen.

11. Ultimately, well-being will increase

In the long term, achieving carbon neutrality will improve human well-being through tackling the worst negative impacts of climate change.

Investing in climate change mitigation opens up new opportunities, says Timo Vesala.

To cope with the environmental crisis, economic restructuring is needed in the coming years. This will require massive investment and a huge amount of new research.

– Investing in a green transition can accelerate innovation and productivity, helping us achieve not only more sustainable, but also higher long-term growth, Vesala says.

Jussi Ahokas explains that investment is the engine of the capitalist money economy as it generates income for the economy.

– Thus, demand from the investment sector flows into the consumer goods and services sector, and the virtuous ends up in the economy. circle. If ecological reconstruction goes uphill, growth projections could be much higher than those we have become accustomed to over the past decades, he predicts.

Sanna Kurronen believes that Finland has the opportunity to become part of this “global megatrend” thanks to its technological expertise and to gain a larger share in relation to the size of the country. Fighting climate change can also be a source of growth for Finland.