If combined with appropriate development policies, a global market can contribute to limiting the negative effects of climate change on economic systems. A new study by CMCC@Ca’Foscari, the strategic partnership between CMCC Foundation and Ca’ Foscari University of Venice, uses a macro-economic model to explore the role of international mobility of labour and capital in market-driven adaptation.

Adaptation is one of the key tools for people and societies to adjust to negative impacts of a changing climate to control, moderate or avoid harm. However, uncertainty still exists on the role of adaptation solutions and their efficiency in absorbing the negative impacts of climate change on people, societies and economies.

A new research paper by CMCC@Ca’Foscari, the strategic partnership between CMCC Foundation and Ca’ Foscari University of Venice, published on Mitigation and Adaptation Strategies for Global Change, shows that a free global market where labour and capital can relocate to different regions may represent a useful option for global economies to adapt to climate change.

This result comes from simulations of a Computable General Equilibrium model, developed at CMCC and based on the model and database of the GTAP Consortium. This model spans a range of socio-economic scenarios, for instance, considering  different degrees of international trade openness and international mobility of labour and capital, and analyses how these scenarios evolve as a consequence of different impacts of climate change. Climate change impacts, that work as shocks on the economic model, are those on crop yields, sea level rise, and heat stress on labour productivity.

The simulations show that a global market, in which both labour and capital can relocate and freely re-distribute in different areas of the world, can help reduce the harm caused by climate change through some mechanisms of autonomous (or market-driven) adaptation.

Climate change does not affect different regions of the world in the same way and by uniform intensity. Tropical and subtropical regions, and the regions in the global South in general, are those most affected by climate change. This means, for example, that regions in the North can produce goods at a cheaper price and therefore are more attractive for the global demand: to a higher demand for goods follows a higher need of labour and a greater flux of capital.

Indeed, these market mechanisms allow economic agents to relocate autonomously in the regions least negatively affected by climate change, i.e., the regions in the global North. The paper shows that this could efficiently contribute to a substantial reduction of the global climate damage, of up to 70% compared to an intermediate climate impact scenario. In this scenario, the global temperature increase by the end of the century is close to 3°C compared to the pre-industrial temperature level.

“This autonomous mechanism allows a substantial reduction in terms of global damage,” says Gabriele Standardi of the CMCC Foundation and Ca’ Foscari University of Venice, author of the paper. “In a global market with freedom of movement, more labour and capital are used in more productive areas, and less labour and capital are used in less productive ones. On the other hand, this also creates a polarization between productive and non-productive regions, that is, an amplification of economic inequalities between the North, where economic activities are concentrated, and the South of the world, which is left with fewer economic activities, less labor, and less capital.”

Relevant implications of these results fall into the sphere of policy. A free global market for labour and capital proves to be a valuable tool for adapting to a new climate. Still, at the same time, appropriate development policies need to be implemented to reduce disparities between North and South. “We should stress that market-driven adaptation does not replace in any way the mitigation policies and the other development policies needed in the most vulnerable areas of the planet,” adds Standardi. “However, promoting a sound legal framework for the international mobility of production factors, specifically labour, should be considered in climate negotiations as a helpful adaptation option.”

More information: 

Standardi G. Exploring market-driven adaptation to climate change in a general equilibrium global trade model. Mitig Adapt Strateg Glob Change (2023) 28:11. https://doi.org/10.1007/s11027-023-10049-6