Global Weather Sensitivity: A Comparative Study - albertotroccoli.org

can make this adaptation extremely costly.
In addition to the clear advantages of managing weather risk at a small
scale, weather hedging could have significantly beneficial effects on total global
output. Our results in Table 4 suggest that a comprehensive weather hedging
strategy for all sixty-eight countries included in this analysis could add approximately
$258 billion to global output per year. This is likely an underestimate
of the potential growth due to a comprehensive global weather hedging strategy.
First, this number reflects only the sixty-eight countries included in the
analysis, which account for just over half the world’s GDP. Second, this method
assumes that countries hedge all of their CAR for each sector and reinvest in
that sector at historical growth rates. It is unreasonable to expect investors will
invest in industries with very poor prospects for growth or negative growth—
for example, the agricultural industry in South Africa grew at an average rate
of -4%. Hedging weather risk will likely allow investors to divert resources into
sectors and industries with greater risk, and therefore greater growth opportunities.
In countries where financial markets are weak, the introduction of weather
risk management products might help the development of local credit channels,
which could significantly boost economic growth.
Finally, this paper suggests a number of directions for future research on
global weather sensitivity. Two key priorities in this process should be developing
reliable databases of historical weather and economic data around the
world, and developing a reliable model to measure the weather sensitivity of
different businesses, sectors, countries, and regions.
This paper’s reliance on
elasticity data from the US is a clear bias that can be addressed in future work.
However, current limitations on the quality and scope of data around the world
make this sort of work extremely challenging. Gathering good data is a prerequisite
for more detailed analysis of world weather sensitivity. Once the data
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