When we think about the costs of climate change, the first thing that comes to mind is usually the catastrophic losses from disasters such as floods and wildfires. But what about everyday expenses like milk, eggs, and your electric bill? Is climate change driving inflation?
The short answer: Probably, but it’s complicated.
There is growing evidence that more frequent extreme weather events actually make some things more expensive. But how this plays out depends on where you live.
The International Monetary Fund, for example, has found that extreme temperatures have actually caused inflation to fall, but only in developing countries. In wealthier countries, heat generally causes prices to rise. Droughts tend to increase inflation, but in poorer countries the effect is greater and lasts longer. And after storms, inflation can rise briefly but then fall below its original level.
Here’s a closer look at how climate change could affect your wallet.
Rather than trying to estimate the overall impact of warming on prices, it is easier to look at a few different goods and services individually. Three major items in the wallet are currently under pressure: food, energy and insurance.
Good harvests, bad harvests
Last year, low rainfall led to poor wheat yields in Eastern Europe and China, dried up coffee plants in Brazil and caused some American ranchers to cull their herds. This led to lower supply and therefore higher prices.
Of course, it’s easier to deal with supply shortages when you can easily buy food from other countries. If it was dry in one part of the world, it could be pouring in another, and producers are generally happy to sell their produce and staples abroad. But politicians are increasingly getting in the way: trade barriers such as tariffs and export controls can close this safety valve.
Climate change is also making it more difficult to transport goods. For example, droughts have reduced water levels on major waterways such as the Mississippi, Yangtze, Rhine and Panama Canal to the point where some barges and ships can no longer pass. If wheat can’t get from a place with a good harvest to a place with a bad harvest, prices will rise even further.
Current under pressure
Extreme weather conditions can wreak havoc on power grids and burden ratepayers with expensive repairs. This is a factor driving up energy prices in California. A study found that weather-related disruptions could increase annual electricity infrastructure costs in the United States by up to 25 percent by the end of this century.
In addition, both high and low temperatures lead to an increase in energy consumption, which increases demand and increases prices. Although warmer winters have brought relief on heating bills for some people in northern states, their homes are generally not built for heat waves. This can mean spending a lot of money on inefficient cooling in the summer. This is especially true for apartment dwellers, who generally cannot add insulation or install new, more efficient central air systems.
“You can get fans, you can get a window unit, but there’s not a lot of incentive for landlords to make those changes,” said Steven Brown, who has studied the financial impact of extreme weather at the Aspen Institute, a nonprofit research organization. “For tenants, it’s like an increase in costs that they’re seeing without much relief.”
More expensive safety nets
Insurers are passing on the rapidly increasing costs of payouts for hail damage, floods and fires to their customer base – even for homes and cars in relatively low-risk locations. If you replace a roof or install a sprinkler system, you may receive a lower premium, but these repairs also cost money.
In regions that are repeatedly hit by storms, it is becoming increasingly difficult to take out insurance at all. In southern Louisiana, some businesses went bankrupt after being overwhelmed by damage from Hurricane Ida in 2021.
“I am still dealing with a claim for a company that has gone bankrupt,” said Jennifer Clements, CEO of Professional Insurance Agents of Louisiana. “It goes and it goes and it goes.”
Louisiana’s state-backed last-resort insurer has stepped in to pay many of these claims, meaning they will ultimately be borne by taxpayers.
“Costs will rise”
A group of researchers tried to estimate what Americans will have to pay overall for warming so far. Your total amount: Between $400 and $900 per person per year. The range is wide in part because it is difficult to determine exactly how much weather disruption there would have been without climate change.
Some of the factors discussed above were not included in their calculations. For food, they only counted U.S. crops — things grown in large quantities, like corn, soybeans, wheat and rice — that were less affected by changing weather conditions. The researchers averaged the energy costs and savings from hotter summers and warmer winters, so they don’t amount to much. In addition to flood damage, health complications from wildfire smoke and additional government spending, insurance was by far the largest cost.
But one of the authors of that paper, MIT economics professor Christopher Knittel, emphasized that the draft legislation is just beginning.
“We are probably at this tipping point where costs are going to rise more quickly,” Professor Knittel said. “The observed costs have been fairly linear so far. In the future they will increase more and more quickly.”
Another type of cost that will most likely rise in the future: the measures governments take to curb warming. The Bank of England, for example, said last year that Britain’s emissions trading program was likely to have raised energy prices and fueled inflation.
Jodie Keane, senior research fellow at ODI Global, a London-based research organization, calls this the “green squeeze.”
This also happens across borders. The European Union, for example, has sought to reduce deforestation and carbon pollution through new trade policies. This increases costs for producers who are simultaneously trying to adapt to changing weather conditions.
“If I am a coffee farmer in the Horn of Africa, I not only have to deal with the challenges of cultivation and the cost of fertilizers, but also the costs of new regulations and shipping costs,” said Dr. Keane. “The constant question is who will bear these cost increases? Is it the hub of production or is it the consumers? It all depends on the market structure and market power.”