A heavily damaged neighbourhood in Jasper, Alta., in August, 2024. Funds and resources that have to be channelled into rebuilding infrastructure and buildings are diverted from other productive uses.AMBER BRACKEN/The Canadian Press
Christina Caron is an independent economist who has advised two Canadian prime ministers and a cabinet minister. The following piece draws from her research in the International Productivity Monitor, “Eroding Natural Capital: An Alternative Explanation for the Secular Decline in Productivity Growth.”
Wildfire incidence has risen sevenfold in Canada’s boreal forests and 11-fold in Western coniferous forests over the past 20 years as climate change has accelerated.
Beyond the immediate effects to our well-being and quality of life are the real and growing economic costs of all forms of environmental damage – climate change, pollution, biodiversity loss and resource depletion – as the frequency of environmental shocks rises.
There is no economic activity in a community that has been evacuated. Resources channelled into rebuilding infrastructure and buildings damaged by extreme weather are diverted from other productive uses and constitute deadweight losses. Rising incidences of crop failures and livestock losses because of drought and volatile weather, together with depleted fish stocks and declines in pollinator populations, reduce our food supply and have been pushing up global food prices in recent years, following nearly a century of real price declines. Wildfire smoke and other forms of pollution have significant health effects that raise health care costs, reduce work capacity and shorten life expectancy.
In short, environmental damage is now eroding our economic prosperity. Several centuries of historically unprecedented economic growth have given way to economic stagnation. Labour productivity growth rates have been declining in advanced economies for several decades, and more recently in emerging economies as well. Multifactor productivity – a key source of improvements in standard of living – has flatlined for the past 15 years in both advanced and emerging economies. Evidence increasingly indicates that environmental deterioration has become a significant drag on economic and productivity growth worldwide.
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Climate change acts as a productivity shock, reducing both output and the supply of productive capital. For example, labour productivity declines by 25 per cent at exposure to temperatures above 25 degrees, by 50 per cent above 33, and by 80 per cent above 35. The Canadian Climate Institute has found that climate change is already resulting in large and rising annual GDP losses in Canada. Other recent research concluded that slower economic growth owing to global warming had reduced world GDP per capita by 15 per cent by 2019.
Pollution is another source of economic harm. Its health effects reduce labour productivity, increase work absences, raise health care costs and lower the return on investments in human capital, in addition to their toll on human suffering. Premature deaths from air pollution were estimated by the World Bank to have reduced global human capital by 0.3 per cent in 2018, at a cost of US$2.2-trillion, or 2.5 per cent of global GDP.
Biodiversity loss and resource depletion also affect our economic bottom line. The productivity of global marine fisheries fell by more than half (57 per cent) over 40 years, according to another World Bank study, as larger and more powerful fleets chased fewer and fewer fish. One third of global land area, particularly crop land, has degraded soil with reduced productivity, largely because of unsustainable agricultural practices; while depletion of groundwater has reduced agricultural productivity and caused ground subsidence in many locations worldwide.
Until recently, many of these costs had been ignored, in part because nature has long been viewed as a “free” good. But economists are increasingly moving to measure the value of the natural environment and to incorporate the concept of “natural capital” into economic analysis, alongside physical and human capital.
The World Bank and the United Nations Economic Program (UNEP) have both undertaken concerted initiatives to measure natural capital, defined as environmental assets (including natural resources, ecosystems and a stable climate) that generate economic goods and services. Both organizations found large declines in global natural capital per capita over the past 30 years – assessed at 50 per cent by the UNEP – with troubling implications for productivity and the sustainability of economic growth.
It is increasingly acknowledged among serious economic actors that environmental degradation is not a peripheral issue, but a fundamental systemic risk that is already undermining growth, productivity and fiscal sustainability. Organizations such as the International Monetary Fund and the Network of Central Banks are taking steps to integrate analyses of nature-related financial and economic risk into their work. The OECD is developing environmentally adjusted productivity measures. And 90 countries, including Canada, are in the process of implementing the United Nations System of Environmental Economic Accounting, which incorporates measures of natural capital.
Addressing environmental risk to the economy requires systematic integration of nature into economic frameworks and policy development, and begins with recognition of nature as the fundamental base of all economies and our most important source of productive capital. Climate action and preservation of the natural environmental are not expendable objectives; they are central to our economic prosperity and well-being.