In a recent exclusive webcast for the UBS Center, University of Chicago’s Professor Esteban Rossi-Hansberg outlined his assessment model of the effect of global warming on economic outcomes and welfare. Assuming heterogenous temperature changes, Rossi-Hansberg explores the resulting impact on decisions regarding where to live, move, trade, and invest.

This article by Albert Steck was originally published in German in the Swiss newspaper «NZZ am Sonntag» on 11 September 2021. Translated and edited for layout purposes by the UBS Center.

Suddenly soy is growing in northern Canada - which other countries are benefiting from climate change?

Investors make high returns with rising land prices in Canada. In Madagascar, on the other hand, the first climate-induced famine is occurring.

Until recently, farmers in the Canadian province of Saskatchewan would have dismissed the sudden rush of bankers scrambling to snatch up land as a bad joke. The region, 3,000 kilometers northwest of Toronto, is too remote. In addition, the winters are harsh.

Nevertheless, there is a gold rush atmosphere here. Investors are buying up huge tracts of land. The leading company, Bonnefield, alone already owns more than 130,000 hectares, which corresponds to the area of the canton of Aargau.

The driver of this boom is climate change. Thanks to warmer temperatures, farmers can suddenly plant much more profitable soybeans instead of rapeseed. This increases their profits by almost half. But even more lucrative are rising land prices. As a result, Bonnefield's investors have reaped an impressive 13% annual return since 2011.

The downside of this upswing can be found in many southern countries, for example in Madagascar. There alone, one million people lack food because the ongoing regional drought has lasted four years. "This region has contributed nothing to climate change," David Beasley, head of the U.N. World Food Program, said in a TV interview. "Yet these people are now paying the highest price."

The agency is already calling it the world's first climate-related famine. The trigger, unlike previous disasters, is not armed conflict. Meanwhile, the Intergovernmental Panel on Climate Change warns that by 2050, the number of people at risk of famine will increase by 80 million.

In view of this misery, isn't it disturbing that at the same time investors like Bonnefield are making huge profits from global warming? No, says Esteban Rossi-Hansberg, the opposite is true. "I think it's great that some forward-thinking financiers have discovered these northern regions. A significant amount of additional capital will be needed to convert them into more densely populated areas."

As a result, the University of Chicago professor says he hopes the profits will encourage more investors to contribute to the development of the far north. Rossi-Hansberg is among the leading economists researching the economic consequences of climate change. This week, he gave a lecture at the UBS Center for Economics in Society at the University of Zurich.

For him, one thing is clear: Global warming is causing massive upheaval. "Global inequality is widening. Because the poorest regions are also the ones that are going to be hit the hardest." The lack of money in these countries makes economic adjustment all the more difficult for them.

In a rich nation such as Switzerland, agriculture contributes just 1% to the national economy. In many emerging countries, by contrast, this share varies between one-third and one-half. In addition, agriculture in North Africa and the Middle East uses up to 80% of the already scarce water. "On their own, it is almost impossible for these countries to make the necessary transition from an agricultural economy to an industrial or service economy," explains Rossi-Hansberg.

By contrast, the situation is much more comfortable in the northern hemisphere. In some countries, not only is the quality of life rising with the temperatures, but so is prosperity. According to the economist, the gross domestic product in some regions could grow by up to 15%. In Sweden, for example, less than 10% of the country's land area is currently in a temperate climate zone. This proportion is projected to rise to over 40% by the end of the century.

A study by the University of Columbia comes to a similar conclusion. According to this study, Canada, Russia and Mongolia can expect the greatest growth stimulus. A positive effect on gross domestic product could also be expected in Switzerland (see chart).

In view of the growing divide between North and South, a key research question for Rossi-Hansberg is: What adjustment mechanisms will achieve a balance? According to the U.S. professor of Mexican heritage, the most effective way is migration. According to his forecast, up to 600 million people will be forced to leave their homes for climatic reasons over the long term.

"Migration leads to a win-win situation: the sparsely populated north benefits because it lacks the labor force for the upswing. At the same time, population pressure in southern countries is alleviated." Another remedy, he said, is to intensify trade. Industrialized nations should do more to open their markets, Rossi-Hansberg believes. "We need to give developing countries a fair chance to build a viable export economy."

Monetary payments would also help alleviate the plight of those adversely affected by climate change. The Paris climate agreement stipulated an annual sum of $100 billion. To date, only a fraction of this amount has actually been spent: the USA has pledged $1.5 billion for the time being.

Rossi-Hansberg criticizes that political discussion often suggests that climate change can be tackled with minimal expenditure. "Unfortunately, false illusions are being created here. The fact is that the massive changes will cause high costs - the only question is who will foot the bill." For this reason, he also supports a CO2 tax to make the polluters more accountable.

How climate change is changing entire sectors of the economy is not only evident in the distant province of Saskatchewan. The winegrowers in Burgundy provide another example of this. Due to higher temperatures, they are now harvesting three weeks earlier than in the 1960s. Their problem, however, is that the grapes accumulate too much sugar due to the heat - which distorts the taste of the wine. Already, French winemakers are switching to more southerly grape varieties from Portugal. Meanwhile, well-known Champagne producers have begun shifting cultivation to southern England. A Dom Perignon from Sussex in the UK could soon become a reality.