The hidden cost of heatwaves: why extreme weather events cost the economy trillions
If you’re located in the Northern Hemisphere, you’ve likely noticed — it's scorching hot. At the time of writing, a mix of global warming and the pesky El Niño weather pattern is causing some wild temperature swings on this side of the world. If you think this hot weather has become increasingly extreme in recent years, you’re not imagining things. Not only do gas emissions from human activity elevate the average global temperature, but they also create heat waves that are longer, more intense, and more frequent.
It’s no secret that heat waves (short periods of extreme heat) mess with our health — thousands of people die from related complications every year. But, you might be surprised to learn that they inflict damage on the global economy, too! A fascinating study revealed that extreme heat events caused by global warming have already cost the world economy trillions of dollars since the early 1990s.
What's even more interesting is that these damages aren’t evenly distributed. Surprisingly, the countries with the lowest carbon emissions end up being hit the hardest by these heat waves. This is a clear example of what's known as 'externalities' in the business world.
What are externalities?
Also known as ‘ripple effects’ externalities are when we do something and it has a surprising, unintentional effect on others. In the business world, they are the outcomes of a company’s actions that have an impact on individuals or businesses outside that company.
It’s important to note that externalities aren’t always harmful —they can be either positive or negative. They can also result from both production and consumption activities. Let’s look at a couple of examples:
Positive production externality: Consider a beekeeper who sets up beehives near a fruit orchard to produce honey. The bees' pollination of the fruit trees enhances the fruit yield and quality in the orchard, leading to increased profits for the fruit farmer. Although the beekeeper's primary goal is honey production, their activity generates an additional positive outcome for the fruit farmer, who benefits from increased fruit production without having to pay directly for the pollination service.
Negative production externality: Imagine a manufacturing plant that releases toxic pollutants into the air and water during its production process. These pollutants harm the health of nearby residents and contaminate the environment, resulting in increased healthcare costs and reduced property values in the area. The factory's production generates negative consequences for individuals and the environment, imposing costs on affected parties (e.g., residents, local government) who are not directly involved in the production process.
Positive consumption externality: Think about an individual receiving a higher education degree. Educated individuals tend to contribute more to society, stimulate economic growth, and improve the overall well-being of their communities. When someone invests in education, the benefits extend beyond themselves, positively affecting society through increased productivity, innovation, and better-informed decision-making.
Negative consumption externality: On the other hand, imagine an individual who smokes cigarettes. Secondhand smoke exposure harms the health of non-smokers, leading to increased healthcare costs and reduced productivity due to illness. The negative effects of smoking extend to people who do not engage in consumption (i.e., non-smokers), imposing costs on them in terms of health and well-being.
The externalities of heatwaves
As you’ve probably already guessed, heatwaves fall into the category of negative production externalities. The greenhouse gasses emitted in one country can cause warming in another, which in turn, lowers their economic growth.
The study we mentioned earlier showed that from 1992 to 2013, heatwaves were statistically linked to variations in economic growth, resulting in an estimated $16 trillion in losses due to the effects of high temperatures on human health, productivity, and agricultural output. To put this into perspective, $16 trillion is equivalent to the entire GDP of the European Union in 2022. That’s a whole lot of money!
The study's most intriguing discovery is that extreme heat significantly impacts the economic growth of the world's poorest and lowest carbon-emitting nations, usually found in tropical regions and the global South. While the wealthier areas like Europe and North America saw an average financial loss of 1.5% of their gross domestic product per person, low-income regions like India and Indonesia suffered a substantial 6.7% loss of GDP per person.
Until now, most studies just looked at averages, which can hide the local and short-term effects. But this fresh research links the emissions of certain countries to the economic losses experienced by other countries over time. It's a fascinating insight that sheds new light on the impact of extreme heat on specific parts of the world.
Why is this relevant for designers?
Beyond becoming more planet-conscious consumers, there’s a lot designers can learn from these surprising knock-on effects of heat waves.
When creating a new product or business, ask yourself if there are design choices you can make to introduce positive or reduce negative externalities throughout the product/service lifecycle. This looks like this:
Assessing the risks: We need to consider whether our products or services might create negative consequences. Gaining clarity over how our products or services impact others (beyond what is immediately obvious) will help mitigate potential ethical, financial, and legal complications.
Designing for positive ripple effects: Apart from making everyone’s lives better, identifying positive externalities can help businesses tap into new revenue streams and gain a competitive advantage. It also helps companies set themselves apart from traditional offerings in the market.
Making the external, visible: It’s one thing to identify externalities — it’s another to actually do something about it. Ignoring these potential unintended consequences can lead to the depletion of natural resources, increased environmental degradation, and social unrest. When you come across a negative externality in your work, bring it up. Make the case from the ethical and business side so that managers can address the issue proactively with stakeholders.