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Ripple effect: How extreme weather affects the global supply chain

·4-min read
A fallen tree lies across a parked car. (Source: Getty)
Severe storms like the one that hit Melbourne last week are likely to become more common. (Source: Getty)

More than 300,000 Victorians were left without power last week after heavy storms damaged critical infrastructure, but new analysis suggests the costs of severe weather events will only grow.

Scientists at the Potsdam Institute for Climate Impact Research (PIK) have found that extreme weather events cause “economic ripples along our supply chains”.

However, if weather events like Victoria’s storms occur at roughly the same time as other major weather events, the economic damage is echoed and amplified by up to 20 per cent.

To arrive at that conclusion, the researchers carried out computer simulations calculating the global response to extreme weather events, assessing 1.8 million economic relations between 7,000 regional economic sectors.

"The phenomenon of economic ripple resonance means that two separate incidents send shock waves through the world economy, and those waves build up - like a tidal wave," said Anders Levermann, department head at Potsdam Institute and scientist at Columbia University in New York, who led the author team.

"Supply shortages increase the demand and that increases the prices. Firms have to pay more for their production goods. In most cases, this will get passed down to the consumer.”

Weather events unpredictable

And as significant weather events happen with little warning, companies struggle to smoothly adapt their capacity and prices.

“If other suppliers fail, due to economic repercussions of another weather extreme elsewhere, the interfering price shocks are intensified,” Levermann added.

Study author Kilian Kuhla claims ripple resonance could become a key factor in assessing the cost of climate change.

Single extreme weather events affect different regions differently, with some seeing supply shortages and others increased demand and higher prices, Kuhla said.

However, when there are multiple events at the same time, the costs escalate.

“When extremes overlap, economic losses in the entire global supply network are, on average, 20 per cent higher,” Kuhla said.

“This is what we see in our simulations of heat-stress events, river floodings and tropical cyclones. It’s a most worrying insight."

Bigger economies suffer bigger losses

Wealthier economies experienced greater losses due to ripple resonance, the researchers added.

Rescuers help to evacuate a patient across floodwaters. (Source: Getty)
When natural disasters happen in countries like China, financial losses increase. (Source: Getty)

In particular, China’s position as a global power meant that when extreme events overlapped, losses could be amplified by as much as 27 per cent, the researchers found.

"If something gets rare, it gets expensive, and if it gets rare worldwide, it gets very expensive. Clearly, that's not new," Levermann explained.

"The new thing is the overlap. So far, people mostly looked at the local damage or, at most, the economic repercussions of one disaster at a time. Now we find that a second disaster happening at about the same time, even if it's in a different corner of the world, can lead to higher worldwide economic losses."

The cost of climate change

The study comes as the world’s leaders meet at the 2021 United Nations Climate Change Conference in Glasgow to discuss the world’s response to the growing climate threat.

Global average temperatures have increased by more than 1.2 degrees since the end of the 19th century, with the UN’s 26th Conference of Parties (COP26) meeting to ensure global temperatures don’t rise more than another 1.5 degrees.

Failure to address rising temperatures could cost Australia $129 billion a year, the Climate Council said in October. Globally, that’s a cumulative cost of $24.1 trillion by 2100.

"By allowing climate change to run wild, we add climate-induced economic losses on top of everything else,” Levermann said.

“If we do not rapidly reduce greenhouse gases, this will cost us - even more than we've expected so far."

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