A Slow Burn

Ric Colacito’s research suggests that, in the worst-case scenario, rising temperatures could reduce U.S. economic growth by up to one-third over the next century.

Ric Colacito
A finance expert specializing in long-term risks and global shocks, Ric Colacito has set his sights on a phenomenon that's both: increasing temperatures from climate change. (photo by Alyssa LaFaro)
August 28th, 2023

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In early July 2023, just two days after Earth’s hottest day on record, Ric Colacito sat in his air-conditioned office, watching the sun bear down on the world outside his window. The economist is interested in the intense heat caused by climate change because it influences his two passions: long-term risks and global shocks.

In the last six months, the Eastern United States experienced warmer-than-average temperatures, intense storms and flooding, and unprecedented wildfires in Hawaii and smoke that spread from fires in Canada to the Eastern U.S. These phenomena affect our health, our homes, and our bank accounts.

At the UNC Kenan-Flagler Business School, Colacito is a finance professor and an expert in international macroeconomics — a large-scale view of how entire economies function. As concerns and data sets around climate change grow, the topic has become one more factor for Colacito to consider when assessing economic health.

“I’m interested in global risks that are going to stick around for a long time,” he says. “And climate change isn’t going anywhere. Nobody around the world can escape this.”

Colacito and his collaborators are conducting novel studies on how climate impacts the economy. In 2018, they produced the first paper to analyze how rising temperatures affect U.S. gross domestic products (GDP) and gross state products (GSP) — monetary values for the goods and services we produce. Their finding: Every one-degree Fahrenheit increase in average summer temperatures decreases state-level output by .15% to .25%.

Those numbers seem minimal until you do the math. The current U.S. GDP is $23 trillion. Two percent of that is $4.6 trillion. When you consider the most extreme projection for increased temperatures and apply that trend to the entire economy over a 100-year timeframe, economic growth may dip by up to one-third.

“It’s a little like saving a small amount of money every month,” Colacito says. “On a month-by-month basis, it doesn’t change your savings account by a whole lot. But once you compound that small amount over 20, 30, 40, 100 years, it becomes a big number.”

Making businesses sweat

The U.S. Census Bureau has tracked GSP since 1957, and weather data dates back even further. All that information is public — and a valuable asset to Colacito and his colleagues for their paper.

“People have been keeping track of temperatures since the Stone Age,” Colacito says with a laugh. “Those data are readily available at the granular, localized level.”

The researchers conducted state-by-state analyses of temperature and economic activity for the four seasons of the year — and quickly decided to focus on summer, a time when seemingly small increases in temperature make a big impact. Then, they honed in on one of the country’s hottest regions: the South.

“When you live in a place like North Carolina, and it gets extremely hot, even a small walk to go grab a coffee feels intense,” Colacito points out. “You feel more tired. You are less productive.”

It’s no surprise that high temperatures lead to less productivity. In their paper, the researchers cite numerous studies on how it affects our ability to work and our overall health. Just this summer, dozens of deaths have occurred because of the record heat wave suffocating the U.S.

What they discovered is that higher temperatures touch industries beyond those that take place mostly outdoors, like agriculture, forestry, and fishing. Climate affects finance, real estate, insurance, retail, wholesale, and construction sectors — which comprise more than a third of the U.S. GDP.

Hot temperatures keep people inside their homes, increasing the importance of real estate decisions. They can also lead to hospitalization, which affects health insurance. And they even influence the auto industry, which drops production at its manufacturing plants when temperatures are above 90 degrees.

Some industries, like utilities and mining sectors, actually benefit from rising temperatures, according to the paper. Warmer weather means more energy consumption and an increase in revenue for these companies.

“This type of exercise must be interpreted with caution,” Colacito warns. “It assumes that our estimates will not change over time and ignores statistical uncertainty. We must recognize that the possible temperature increases over the next 100 years come with a large bracket of projections.”

Measuring the heat on Twitter

More recently, Colacito has been working on a project measuring the attention climate change garners across the globe. He and his collaborators created an algorithm monitoring Twitter activity for numerous international newspapers. It maintained a daily record of tweets that use climate-related words.

“We can do this at a country-specific level, and then we can aggregate it to get a global index of climate attention in the world,” Colacito shares. “Once we have that global index, we can start thinking about outcomes that affect multiple countries, like currency movement and international trade. The sky’s the limit.”

Some trends are what you’d expect, Colacito points out. For example, when there’s a big climate convention or a slurry of news about 20-year-old environmental activist Greta Thunberg, the index spikes.

“But there are also other events, some of which are local, some of which are global, in which the index moves substantially,” he says. “And those are events that you would not necessarily think about because they are not as widely discussed in the news.”

Those results will be shared in a paper slated to release later this year.

Cooling the economy for the next generation

In addition to research and teaching, Colacito also directs the Kenan-Flagler’s Center for Excellence in Investment Management — which prepares students for jobs in public and private equities, private wealth management, capital markets, and sales and trading. Part of that preparation includes understanding the needs of clients in the current market.

“A lot of investors are demanding corporations provide more disclosure about their exposure to climate risks and their carbon footprint,” Colacito says.

For example, corporations with headquarters or facilities in hazard-prone states like Florida and California may be more at risk of losing assets. Additionally, many of the decisions these companies make contribute to the warming of the planet. Investors want to know what they are doing to offset that carbon cost.

“We need to trust the science that temperatures are bound to increase. If we keep neglecting it, then our research suggests that the economy is going to grow at a slower pace,” Colacito says. “And a slow economy is something we should care about. It may mean less jobs. It may mean less opportunities. It may mean that our children and grandchildren are going to have less resources going forward.”

Ric Colacito is a professor of finance, Sarah Graham Kenan scholar, and director of the Center for Excellence in Investment Management within the UNC Kenan-Flagler Business School and an adjunct associate professor in the Department of Economics within the UNC College of Arts and Sciences.