Leavey Professor Victoria Xie Uncovers the Hidden Costs of Climate Change
For years, scientists and researchers around the world have cautioned that climate change will have a profound impact on every facet of human existence. However, this concept can be hard to comprehend when its effects are not directly and immediately felt by individuals or when a business’ bottom line is not explicitly impacted.
As Victoria Xie, professor of economics, began researching the economic impacts of climate change, she noticed that previous research predominantly focused on agricultural impacts in developed countries. “There was relatively less research on how climate change impacts firms and the macro-economy, especially in developing countries,” said Xie. “This really inspired my line of research, which has investigated various hidden channels of how climate change matters for firms and workers, both in the short and long run”.
Xie’s recent research, Labor Market Adjustment to Extreme Heat Shocks: Evidence from Brazil, finds that more extreme heat days lead to layoffs in formal manufacturing sectors in Brazil. While these layoffs are correlated with the increasing intensity and frequency of heat shocks due to climate change, the lack of adaptation technologies (such as air conditioning) in the industrial sectors in developing countries could lead to worsened labor market outcomes.
“On top of that,” Xie explained, “once these workers are laid off, they have a hard time finding a comparable formal sector job. A significant fraction of them become unemployed or move to lower-paying informal jobs with fewer social welfare benefits.”
Xie’s pioneering research indicates that climate change poses significant challenges to manufacturing workers, who are more vulnerable to layoffs and subsequent job reallocation failures. Moreover, it indicates that extreme weather shocks pose significant challenges to workers, especially as climate change interacts with labor market frictions in developing countries.
The estimates from her research can help to inform major climate policy instruments such as calculating the social cost of carbon, as it shows the importance of taking into consideration the costs of climate change to firms and workers, both in the short and long run. Carbon pricing models will need to be updated to incorporate a more comprehensive assessment of how warming temperatures are impacting businesses, through expectation and general equilibrium channels.
While world leaders have made more of an effort in recent years to offset the negative effects of climate change with initiatives like carbon pricing, which is widely favored by economists, politicians, and business leaders, Xie and her colleagues argue that climate action must be taken more seriously for the good of the planet as well as the global economy.
Historically, carbon pricing has not incorporated the hidden costs Xie has uncovered associated with climate change in the industrial sector. The estimates from her research will inform major climate policy instruments such as calculating the social cost of carbon and show the importance of taking into consideration the costs of climate change to both firms and workers, in the short and long run. With this new research, policy makers should update carbon pricing models to incorporate a more comprehensive assessment of how warming temperatures are impacting businesses.
Xie hopes that research like hers will help reshape the perspectives of influential decision-makers in politics and businesses who may not be aware of the full scale of climate change’s costs. Research that showcases extreme weather events’ present effects on the labor market, economies, and firms, can make all the difference in tackling climate change long-term.
Continuing her work to build awareness around the effects of climate change, Xie is now looking into novel data in household finance to explore more direct correlation to the consumer. Her current research focuses on how extreme weather exposures affect payday loan market outcomes for low-income households in the United States.
“The Inflation Reduction Act, a ‘green industrial policy’ which passed last year, was a big move towards the clean energy transition in the US,” said Xie. “I hope that through continued research we can begin to unpack the implications of this important policy on the environment and on the regional economy.”