The Economy Can’t Handle the Heat—or the Swings

Hot temperatures have significant and far-reaching effects on India, impacting public health, agriculture, the economy, and infrastructure. Heatwaves, now more frequent and intense due to climate change, pose severe health risks, especially for vulnerable populations such as the elderly, children, and outdoor workers, often leading to heatstroke and increased mortality. 

In agriculture, high temperatures stress crops like wheat and rice, reducing yields and threatening food security in a country where millions depend on farming for their livelihood. Urban areas suffer from the “urban heat island” effect, straining electricity grids as demand for air conditioning surges. 

Moreover, extreme heat disrupts labour productivity, particularly in outdoor and informal sectors, exacerbating inequality. These cascading effects underscore the urgent need for climate adaptation and mitigation strategies across India.

Given this saturnine state of affairs, it is of great interest to investigate the causal effects of temperature variability, distinct from average temperature, on long-term economic outcomes in developing nations like India. New research sheds valuable light on this question. 

Recognising that climate variability occurs on multiple time scales, this research disaggregates temperature variability into three types: day-to-day, seasonal, and interannual. Using a novel econometric technique called spatial first differences, which compares geographically proximate areas, this research isolates the impact of temperature variability on economic activity, proxied by satellite-recorded nightlight intensity.

The central findings indicate that day-to-day temperature variability has a large and statistically significant negative effect on economic development. What this means in terms of elementary statistics is that a one standard deviation increase in day-to-day variability reduces nightlight intensity by around 16%, suggesting serious economic consequences. 

Seasonal variability, which represents the annual range in monthly temperatures, also negatively impacts economic activity, although the impact is somewhat muted at around 9% reduction per standard deviation. What is unusual is the impact of interannual variability, which is defined to be the year-to-year variation in annual temperatures. 

Here, we see a non-linear effect. In other words, this kind of variability leads to a positive impact in colder regions, with mean annual temperature below 20°C, and to a negative impact in warmer regions. These findings certainly suggest that the economic impact of year-to-year temperature fluctuations depends on baseline climate conditions.

The research under discussion emphasises that most of the negative observed effects of temperature variability can be attributed to two primary mechanisms. First, there are the ex post effects. 

These refer to the non-linear relationships between daily temperature levels and economic outcomes, where extreme temperatures disrupt productivity, agriculture, and health. Second, and in contrast, there are the ex ante effects. These effects pertain to the increased uncertainty about future temperatures, which discourages investment and economic planning, particularly in regions with less predictable climate patterns.

It is worth noting that the research in question highlights the point that current climate-economic models and policy assessments often overlook the costs of temperature variability, focusing instead on average temperature effects. 

The research results suggest that climate change may impose additional, underestimated burdens through increased variability, particularly on warm and currently poorer regions, where both seasonal and interannual variability are expected to rise. These distributional impacts may well exacerbate global inequalities.

In sum, this body of work advances our understanding of how temperature variability affects long-run economic development, providing empirical evidence of its significant and heterogeneous impacts. 

By integrating cross-sectional and temporal analyses, the research offers a comprehensive perspective on the economic costs of climate variability, emphasising the need for implementing policies that address both mean temperature changes and variability to mitigate future climate risks.

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