Climate Change and Developing Countries in

2050

Will the citizens of present day developing countries be able to retain their wealth?

David Manukjan

10/17/2013

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Introduction to Climate Change and Its Effects on the Future

Climate change is inevitable; the only uncertainty is how severe its impacts will be. It is

widely accepted in the scientific community that in order to prevent the very worst impacts of

climate change, the increase in global temperature by 2050 should be below 2 degrees Celsius. If

global temperatures increase by more than 2°C, the effects compound and become even worse.

Since the year 2000, worldwide carbon dioxide concentrations have decreased by approximately

0.8% per year. However, to achieve the 2°C target by 2050, carbon dioxide concentrations would

have to be cut by 5.1% every year (Johnson, 2012). Even if this rate were achievable in the

future, it is unreasonable to expect it to be achieved in the short term, meaning that the reduction

in carbon in later years would need to be far greater than 5.1% in order to achieve the 2°C target.

However, governments’ ambitions to limit global warming to 2°C seem highly unrealistic, and I

believe that an increase in global temperatures between 2.5 and 4°C by the year 2050 seems most

likely, with 6°C and above a pessimistic, yet still plausible, scenario. Figure 1 shows the

estimated global temperature increases that will occur for different average annual rates of

decarburization to the year 2050. A ―business as usual‖ approach to global warming, where the

world continues to decarbonize at the current 0.8 rate, would result in a 6°C increase in global

temperatures. An annual decarburization rate of 2.9% would lead to a 4°C increase in

temperatures. This ―gradual greening‖ scenario would require energy intensity improvements in

the short term of twice the average rate since 2000, for China and India to significantly shift from

coal to natural gas, and for renewable fuels to be used worldwide by 2050. Past studies predict

that this kind of program should not reduce global GDP in 2050 by more than 2-3% of GDP, but

would require a much greater commitment from all major economies than what has occurred in

recent years (Johnson, 2012). It is important to note that while this is the most likely scenario to

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occur and is better than a 6°C rise in temperatures, it would still be highly damaging to the

world, economically, socially, and politically.

While most developed countries and most of the BRIC countries have had stable or

declining rates in change of carbon intensity, a growing concern is now on second and third

world countries that are showing signs of high economic growth rates for the future. As these

countries rush to develop, more CO2 emissions will be generated as a result, making it more

difficult to reduce worldwide carbon dioxide concentrations. This could possibly even lower

future annual rates of global decarburization, which would in turn raise the global temperature.

Figure 1: Implied concentration levels at different rates of decarburization.

Source: Johnson (2012).

The effects of global warming will severely risk human development. Extreme

temperatures, heat waves, rainfall, and droughts are projected to increase with rising

temperatures, and risks will be much higher in a 4°C warmer world compared to a 2°C warmer

world (World Bank, 2012). A 4°C increase in global temperatures would raise land temperatures

on average by 4 to 10°C, because the increase in overall global temperature is compounded

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rather than simply added on to current temperatures. In regions such as the Mediterranean, North

Africa, the Middle East, and the Tibetan plateau, almost all summer months are likely to be

warmer than the most extreme heat waves presently experienced. These heat waves would cause

death, forest fires, and harvest losses.

Aside from the heat risks, the increased carbon dioxide concentrations in the atmosphere

would cause the world’s oceans to become more acidic. Ocean acidification would cause great

harm to marine life, coral reefs, and the people that depend on them for food, income, and

tourism. Climate change will become the number one cause of ecosystem damage, surpassing

habitat destruction by humans.

Rising sea levels are also a consequence of rising global temperatures, with a predicted

rise of .3 to .8 meters in sea level by 2100 from a 2°C increase in global temperatures. This

would lead to altered and severe weather patterns, endangering highly vulnerable small island

states and cities in Mozambique, Madagascar, Mexico, Venezuela, India, Bangladesh, Indonesia,

the Philippines, and Vietnam.

Global food security will be difficult to achieve, with changing weather patterns making

different parts of the world suitable for food production every decade and decreasing crop yields

(Nelson, 2010). These altered climate patterns and food and water shortages would displace large

populations of people (World Business Council for Sustainable Development). The comparative

advantage of food production will shift towards developed countries due to changing weather

patterns. Air pollution will overtake contaminated water and lack of sanitation as the prime cause

of premature mortality across the globe, potentially rising to 3.6 million deaths per year—mostly

in China and India (Organization for Economic Co-operation and Development, 2012). Poverty,

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nutritional deficits, water contamination, and incidences of epidemic diseases are all expected to

increase, mainly in developing countries.

Developing countries are geologically most affected by climate change, and their

economies are most likely too sensitive to absorb the costs of climate change while maintaining

high growth rates. I predict that as developing countries advance economically in the present

day, they will increase global carbon levels and prevent global decarburization levels from

reaching those needed to prevent severe climate change. As a result, I hypothesize that the

purchasing power parity of the people in these developing countries will not increase greatly

because the costs of food, clean water, and other necessities will rise due to decreased supply

caused by the environmental damage from globalization.

Hypothesis

The citizens of the United States and other developed countries will be able to absorb the

increased prices of commodities and the added costs of global warming, because they will still

have a high purchasing power parity per capita in 2050. Citizens in current developing countries

will not be able to adjust to these added costs because their spending power will not grow

enough by 2050 to cover these added costs.

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Methodology

It is difficult estimating what will happen 40 years from now, given what an

unpredictable environment the world will be in 2050. However, it is possible to give an

approximate estimate, which is something I will attempt to do. My calculations can be found on

pages 6 and 7. I first found the twenty countries with the largest gross domestic product at

purchasing power parity in 2011 (World Bank, 2011). I then found the populations for these

countries in 2011 using the World Bank database, and divided the GDP at PPP by the population

to find the gross domestic product at purchasing power parity per capita (World Bank, 2011).

This would give a person’s average spending power relative to the United States. I then ranked

the countries from greatest to lowest GDP at PPP per capita for comparison purposes. I chose to

use this this method of comparison as opposed to using market exchange rates so that I could

more easily compare spending power and average living standards across all twenty countries.

Next, I researched and found the projected GDP at PPP forecasts for the 20 largest

economies for the year 2050, estimated by PricewaterhouseCoopers (Hawksworth and Chan,

2013). I then used the World Bank’s estimates for the 2050 population to find and rank the GDP

at PPP per capita (World Bank, 2011). To get a better understanding of the quality of life in the

twenty countries with the largest economies, I then subtracted the 2011 poverty threshold in the

United States, which for an individual is an income of $11,484 or less, from the GDP at PPP per

capita for each country (United States Census Bureau, 2011). This would measure a person’s

average spending capacity after meeting their basic survival needs from their annual income.

Since purchasing power parity rates for each country are adjusted based on the cost of a basket of

goods that typically meet basic needs, I believe that this method is applicatory, though it is a

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Figures 2 and 3: 2011 and 2050 GDP at PPP per capita calculations

Country GDP at PPP ($billion) Population (thousands) GDP at PPP per capita

US 15,094 309,349 $48,793

China 11,347 1,338,300 $8,479

India 4,531 1,224,615 $3,700

Japan 4,381 127,451 $34,374

Germany 3,221 81,777 $39,388

Russia 3,031 141,750 $21,383

Brazil 2,305 194,946 $11,824

France 2,303 64,895 $35,488

UK 2,287 62,232 $36,750

Italy 1,979 60,483 $32,720

Mexico 1,761 113,423 $15,526

Spain 1,512 46,071 $32,819

South Korea 1,504 48,875 $30,772

Canada 1,398 34,126 $40,966

Turkey 1,243 72,752 $17,085

Indonesia 1,131 239,870 $4,715

Australia 893 22,299 $40,047

Poland 813 38,184 $21,292

Argentina 720 40,412 $17,816

Saudi Arabia 686 27,448 $24,993

2011

Country Projected GDP at PPP ($billion) Population (thousands) GDP at PPP per capita

China 53,856 1,273,054 $42,305

US 37,998 397,979 $95,477

India 34,704 1,684,197 $20,606

Brazil 8,825 218,655 $40,360

Japan 8,065 105,680 $76,315

Russia 8,013 124,280 $64,475

Mexico 7,409 142,253 $52,083

Indonesia 6,346 289,452 $21,924

Germany 5,822 71,992 $80,870

France 5,714 73,225 $78,033

UK 5,598 71,484 $78,311

Turkey 5,032 91,088 $55,243

Nigeria 3,964 388,428 $10,205

Italy 3,867 58,779 $65,789

Spain 3,612 51,452 $70,201

Canada 3,549 43,613 $81,375

South Korea 3,545 46,411 $76,383

Saudi Arabia 3,090 43,160 $71,594

Vietnam 2,715 101,377 $26,781

Argentina 2,620 50,003 $52,397

2050

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Figures 4 and 5: 2011 and 2050 GDP at PPP per capita over Poverty Threshold Calculations

Country GDP at PPP per capita GDP at PPP per capita over Poverty Threshold

US $48,793 $37,309

Canada $40,966 $29,482

Australia $40,047 $28,563

Germany $39,388 $27,904

UK $36,750 $25,266

France $35,488 $24,004

Japan $34,374 $22,890

Spain $32,819 $21,335

Italy $32,720 $21,236

South Korea $30,772 $19,288

Saudi Arabia $24,993 $13,509

Russia $21,383 $9,899

Poland $21,292 $9,808

Argentina $17,816 $6,332

Turkey $17,085 $5,601

Mexico $15,526 $4,042

Brazil $11,824 $340

China $8,479 -$3,005

Indonesia $4,715 -$6,769

India $3,700 -$7,784

2011

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rough comparison since levels of poverty are measured differently abroad. The reason some

countries have negative GDP at PPP per capita over the Poverty Threshold values is because

large parts of the populations of those countries are unable to meet their basic needs, and

starvation and malnutrition are still common there.

I then attempted to replicate the same comparison, but for the year 2050. I already had the

GDP at PPP per capita calculated, but after researching, I found no estimated values for the

estimated poverty threshold in 2050. However, I recognized that the poverty threshold was

adjusted yearly for inflation from the change in the consumer price index of urban customers

(Bureau of Labor Statistics, 2013). Thus, I used the 2011 poverty threshold in the United States

of $11,484 as the present value, and discounted it at the forecasted annual inflation rates of the

CPI-U index until the year 2022, which were provided by the Congressional Budget Office

(Congressional Budget Office, 2012). This would lead me to the future value of the poverty

threshold in 2022, $14,909.50. From there, I had to estimate my own inflation rates in order to

forecast the poverty threshold in 2050. For years 2022 – 2025, I used an annual 2.8% inflation

rate, for 2025-2035 a 3.3% rate, for 2035-2045 a 4% rate, and for 2046-2050 a 4.5% rate. A

summary of these rates can be seen in Figure 6. After discounting at these rates, I found the

future value of the poverty threshold in 2050 to be $41,339.

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Figure 6: Summary of inflation rates used in predicting 2050 poverty threshold

Source: Congressional Budget Office 2012 and author’s estimates

I chose to steadily increase the inflation rate until 2050 to account for rising food and

energy costs as the effects of climate change worsen. Real food prices are expected to almost

double by the year 2050, even of basic food staples as shown in Figure 7 (Nelson, 2010). I

believe that the inflation rates I’ve used are realistic and possibly even a conservative estimate,

considering that mean annual inflation rate since the government began recording these values in

1913 was 3.33%. Using the average annual inflation rate since 1913 to find the future value of

2050 from the 2022 present value, I found that the future value in 2050 would be $37,403.19,

which is only $3935.86 lower than my own estimate.

Rates used in Calculations

2011 = 3.2%

2012 = 2.1%

2013 = 1.5%

2014 = 1.6%

2015 = 2.0%

2016 = 2.2%

2017 = 2.3%

2018 = 2.3%

2019 = 2.3%

2020 = 2.3%

2021 = 2.3%

2022 = 2.3%

2022 - 2025 = 2.8% each year

2025-2035 = 3.3% each year

2035 -2045=4.0% each year

2046-2050 = 4.5% each year

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Figure 7: Forecasted percentage real price increases from 2010 to 2050 of basic food commodities

Source: Nelson (2010).

The next section speaks about what the future will be like in countries with negative or

low values for GDP at PPP per capita over the poverty threshold in 2050.

Findings: Climate change offsets some of the benefits of income growth

My research shows that climate change offsets some of the benefits of income growth

due to high inflation and rising real costs. I believe that in the year 2050, investment in countries

with negative values for GDP at PPP per capita over the poverty threshold will be risky

investments. Countries with negative values for GDP at PPP per capita over the poverty

threshold will have difficulties protecting citizens from the effects of climate change and may

have to increase investment in social safety nets, and some of those countries harder hit by

climate change will have lower GDP at PPP per capita in 2050 than they do in 2013. Some of the

6°C

3-4°C

>6°C

2050 Global

Temperature

Increase

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current N-11 countries will still have wealthier citizens on average than some of the current

BRIC countries in 2050, though the BRIC countries will have higher overall GDPs. My

calculations do not include the damages of global warming, which for the year 2050 are

estimated to be $558.57 billion dollars for the United States, or about 1.47% of GDP (Ackerman

and Stanton, 2008). I did not include theses costs when comparing the country’s citizens’ ability

to maintain a quality of life above poverty, because global warming damages would vary greatly

depending on the country, and data was not available for most of them. Thus it can be expected

that spending potential will be even lower.

From the countries with negative values for GDP at PPP per capita in 2011, China was

the only country to get a positive value for 2050. Brazil actually dropped from +$340 to -978. It

seems like the average spending potential of citizens in most of the currently developing

countries will not rise fast enough to improve their quality of life by 2050’s standards, while

countries whose GDP at PPP per capita are currently above the poverty threshold will continue

to thrive and grow with the exception of Australia (which is due to heat waves, other severe

weather effects, and a decline in population).

I believe that this is because the economies currently doing well economically have a

technological, capital, and educational advantage that developing countries will not be able to

catch up to in time before inflation, food prices, and costs from global warming begin to rise.

When these changes start, the people in the developing countries will still have a higher

purchasing power parity per capita than they do in the present day. However, citizens in current

developing countries will not be able to adjust to these added costs because their spending power

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will not grow enough by 2050 to cover these added costs. Thus, my findings support my

hypothesis.

Planning for the Future

Climate change will increase the risks associated with foreign direct investment in low or

negative GDP at PPP per capita over the poverty threshold countries, because of their lower

capacity of absorbing the costs associated with climate change. Investors may want to choose

instead to invest in countries with medium-to-low positive GDP at PPP per capita over the

poverty threshold countries or in regions where climate risk is not as high, depending on their

tolerance for risk. Any investment in long-term assets or infrastructure, particularly in coastal or

low-lying regions, needs to be prepared for damages. Governments should consider providing

incentives to attract citizens away from high risk regions to inland locations and higher altitudes

so that money in the present day is not wasted on infrastructure or protection that might

ultimately be destroyed, abandoned, or ineffective. It is important that the people who become

displaced by climate change will have somewhere to go, and won’t be starting off with nothing.

Additionally, citizens should save for their own retirement and decrease their reliance on

government programs, because the likelihood of countries being fully prepared for a future of

global warming is low.

All countries need to strengthen their food, water, and energy supply chains. It is possible

that the worse the effects of climate change become, the more protectionist developed countries

will become, despite the fact that due to the severe weather changes international trade of food

will need to increase significantly in order to feed the world population. The production of food

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in developed countries generally benefits from climate change, compensating for declines in

developing nations (Nelson, 2010). Carbon intensive industries need to anticipate more invasive

regulation and plan accordingly and begin considering their options for alternate sources of

energy. By 2050, there will be an increase between 8.5 and 10.3 percent in the number of

malnourished children in all developing countries (Nelson, 2010).

The only way to avoid terrible effects of climate change is for there to be radical

transformations in the ways the global economy currently functions: rapid uptake of renewable

energy, sharp falls in fossil fuel use, removal of industrial emissions and halting deforestation.

Clearly the world is currently not on this path. How many ways are there to say the world is

heading for hard times? As citizens, we must push for more aggressive climate policy, both at a

national and international level. As investors, we must begin to monitor effects of climate change

and begin considering them when we evaluate risk.

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