A financial disaster in the making: Temperature shocks, climate change and savings

Abstract

Research on climate change and its effects has seen a surge in interest as global temperatures continue to rise. A related body of literature focuses on the impact of weather on financial decisions. However, there is very little evidence on the channels through which temperature shocks affect savings. This is a significant shortcoming in the existing literature given the growing tendency among policymakers to use savings as an indicator of financial wellbeing. We present the first study on the impact of weather shocks and climate change on household savings behaviour. We use data from the Household, Income and Labour Dynamics in Australia (HILDA) survey, which we merge with satellite data measuring temperature shocks at the neighbourhood level. We find that the number of days when daily average temperatures are below 10 °C or above 30 °C has a negative effect on net worth and savings, relative to the number of days in the 20-25 °C range. We find that income, risk preferences and time preferences mediate the relationship between temperature shocks and savings. To examine the impact of climate change, we use temperature projections to simulate how global warming can be expected to affect savings and net worth in the short, medium and long-term. We find that over the course of the rest of the century, if no counter measures are taken to address climate change, net worth would decrease by 0.358 standard deviations and savings by 0.034 standard deviations compared with the ‘best case’ scenario for climate change which saw the widespread adoption of renewable energy sources.