Understanding the economic impacts of climate change will become vital as global warming exceeds 1.5 degrees, but economic models underestimate climate risks, according to a climate change economist.

Climate change is set to affect global supply chains in unprecedented ways, notably in weather-dependent sectors such as agriculture.

“Once warming gets beyond two and a half degrees, the impacts on the global economy could be extremely severe and potentially catastrophic,” climate change economist Dr Timothy Neal told Accounting Times.

Two major global studies have found that earth is likely already warming past the 1.5 degree boundary drawn by the Paris Agreement, right as the US scales back their ambition on climate action and businesses quietly withdraw sustainability pledges.

“Trends in geopolitics in the last few years are in the negative direction,” Neal said.

“It just makes the hope for serious global action less likely, which coincidentally makes research into the impacts of climate change even more important, because it's looking more and more likely that we're not going to be able to solve this politically, at least in the short term.”

An uptick in environmental events affecting food production in Australia has already been seen. According to the NSW government, severe droughts have already reduced Australia’s GDP by about 1 per cent. By 2050, extreme climate-change related weather events are projected to halve the agricultural output of the Murray-Darling food basin, which accounts for 50 per cent of Australia’s irrigated agricultural output, by value.

Recent flooding in Far North Queensland threatened to create price spikes for bananas, as damaged road networks shut down supply chains in an area that accounts for almost 94 per cent of Australia’s banana production, according to the Australian Banana Growers’ Council.

When sporadic weather shocks occur, Neal said, trade can be relied on.

“Because of trade and this globalized economy we now have, if there's a drought, then that leads to poor harvests, you can usually rely on importing from countries that have had good weather and good harvests in recent years,” he said.

For example, during the 2018–2020 drought in eastern Australia, grain production fell below consumption levels. NSW and Queensland responded by importing grains from Western Australia, where the drought was not as severe, mitigating food shortages.

However, if the planet passes 2.5 degrees of warming, it will see more scenarios where multiple places experience bad weather at the same time.

“The problem of severe climate change in the future is that it's going to be a global weather shock,” Neal said.

“That is when you could have major supply chain disruption. You can have very severe increases of spikes in prices of basic foods. And that is when you could start to see very dramatic and severe consequences for food security, even in the developed world.

“There would likely be a lot of famine in a world with two and a half degrees of warming.”

Globally, price spikes for certain goods due to extreme weather events have already been seen.

“Commodity price volatility [is] expected to persist as extreme weather continues to hit regional crop yields,” supply chain consultancy Inverto said in a release.

According to their research, cocoa prices have risen by 163 per cent in the past year, and coffee prices by 103 per cent.

Droughts in the two largest coffee producing countries, Brazil and Vietnam, have hampered crop yields, putting upward pressure on coffee prices.

To spur environmental action and awareness among businesses, Australia introduced mandatory climate disclosure requirements to boost transparency surrounding companies’ climate goals and risks.

While this is a positive move, there is a risk that companies will inadequately assess their climate risks and give themselves and investors overconfidence in regards to future risk exposure, Neal said.

“My view is that it is extremely difficult to properly economically forecast the things that it would be relevant for business to know under future climate change scenarios for companies to properly assess their true physical risks of the future.”

He warned that current economic models do not accurately quantify the effects of climate change when considering isolated weather events.

“Even when the weather is bad in Australia, food prices can remain completely flat purely because of what's going on elsewhere in the world. So when you run a model that relates local food prices with local weather, you can get an estimate of climate change impact that's very small,” Neal said.

“There's very hard limits on what models can do to tell us with any certainty what could happen, as climate change is completely unprecedented in coming decades.”

“When you start looking at scenarios of two, two and a half, three degrees of warming, or even worse, that's a climate that is completely unprecedented in human history. We don't have data on what has happened in the past under similar environments.”