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LEE Jee-Hoon

The Economics of Extreme Weather Events

LEE Jee-Hoon

Feb. 16, 2010

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The new year ushered in extreme weather around the world with record cold and heavy snow belting the Northern Hemisphere and torrential rain engulfing the Southern Hemisphere. Beijing received 33 centimeters (13 inches) of snow on January 3, the capital's heaviest daily snowfall in 59 years. A week later, a 40-year low of 1.7 degrees Celsius was set in Miami, Florida, far below its average January low of 15.6 degrees Celsius. Nine parts of New South Wales in Australia were declared natural disaster areas after heavy rain that began on Christmas Day and continued to January 7. Similarly, month-long flood conditions that began in late December killed 40 people in Kenya.

Extreme snow and cold did not spare Korea either. On January 4, 25.8 centimeters of snow has fallen in Seoul. It broke the previous high of 25.6 centimeters in 1969 and was the highest amount since the nation's weather data was first collected in 1937. January also saw 10 days of minus 10 degrees Celsius temperatures, the most since January 1985.

The severity of the weather can be traced directly to a change in climate stemming from mounting greenhouse gas in earth's atmosphere. Climate is a distribution of weather events and entails the average, range and variability of weather elements. Cl imate change involves distribution of weather over a long period of time, and extreme weather events are extraordinary incidents linked to climate change.

The recent severe weather events are typical examples of what happens with climate changes. The Arctic temperature since mid-December has hovered around minus 20 degrees Celsius, 10 degrees higher than the norm, causing the Arctic jet stream to weaken. That has allowed Arctic air normally blocked by the jet stream to move southward. Meanwhile, El Nino Modoki, which scientific studies link to climate change, has occurred in the central Pacific Ocean. El Nino Modoki differs from El Nino, which periodically occurs in the eastern Pacific near Peru and Ecuador and is unrelated to climate change. El Nino Modoki is being blamed for the heavy snow and due to warm, moist air it generates colliding with Arctic air.

As extraordinary weather events are the result of climate changes and the direct cause of climate change is greenhouse emissions caused by humans, as proven by the Intergovernmental Panel on Climate Change (IPCC), the weather changes are the result of human actions rather than natural climate changes. The IPCC estimates an over-90% possibility of climate change coming from human activities.

Thus, to leave this matter unsettled will make extraordinary weather events become daily events. IPCC warns that if greenhouse gas emissions are not restrained, the world average temperature may rise as much as 6.4 degrees Celsius this century. That is a tremendous increase considering it has risen only 0.8 degrees in the 250 years since the Industrial Revolution. Unless this issue is resolved economic damages from extreme weather events could reach up to 20% of world GDP by 2100, which could generate a shock equal to that of Great Depression in the 1930s.

Long-term climate change would affect economic activity in different ways. Agricultural business, which is typically the most weather sensitive, would suffer from falling output. The heavy snowfall in early January in Seoul is a case in point. It affected the supply of red lettuce, which is grown in suburban Seoul, resulting in a 64.5% surge in auction price at the Gangseo Agricultural Wholesale Market. The construction industry would suffer delay and accidents, causing an increase in labor costs and other expenses.

The transportation sector would experience flight and shipping cancellations and traffic jams. In 2009, problems on the country's 27 express highways caused by severe weather cost an estimated 398.15 billion won. Like agriculture, the manufacturing sector would suffer disruptions in production planning, inventory management and sales. An inaccurate weather forecast not only results in excess inventory but also the loss of opportunities to rivals. As for the retail sector, weather changes would dent sales in offline stores like large department stores, but a rise at Internet shopping malls and home shopping television channels. The record heavy snow in Seoul in January 4 boosted sales at Hyundai H Mall and GS Home Shopping 54% and 30%, respectively, from the same day in 2009.

The weather industry, which involves the weather-related, manufactured goods and weather-related services such as forecasting, consulting and financial services, is growing rapidly. The market for Korean weather industry began in 1997 with the introduction of weather business, which reached 44.33 billion won in 2009, rising by 94.3 times in 12 years. Compared with the US and Japanese markets, Korea's market has sufficient growth potential. In 2006, the US' weather industry's market was 2.2 trillion won, 114.2 times Korea's 19.26 billion won, but this should take into account that the GDP of the US was 14.1 times larger than Korea's that year. In 2007, in Japan, whose economic size was 4.2 times bigger than that of Korea, the market size was 380 billion won, 13.1 times Korea's 29.08 billion.

To prepare for extreme weather events becoming regular occurrences, the government should integrate extreme weather-related laws that are enforced on an individual basis and devise a crisis management system that can immediately cope with extreme situations. It is also imperative to encourage the weather industry to prepare for extreme conditions as it secures new growth engines. Companies should consider extreme weather events in management, considering weather as a risk factor as it does with oil prices, foreign exchange rate and interest rates, while aggressively making inroads into the emerging weather industry to create new profit-making opportunities.

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