Economic Growth Effects of Alternative Climate Change Impact Channels in Economic Modeling

Abstract

Despite increasing empirical evidence of strong links between climate and economic growth, there is no established model to describe the dynamics of how different types of climate shocks affect growth patterns. Here we present the first comprehensive, comparative analysis of the long-term dynamics of one-time, temporary climate shocks on production factors, and factor productivity, respectively, in a Ramsey-type growth model. Damages acting directly on production factors allow us to study dynamic effects on factor allocation, savings and economic growth. We find that the persistence of impacts on economic activity is smallest for climate shocks directly impacting output, and successively increases for direct damages on capital, loss of labor and productivity shocks, related to different responses in savings rates and factor-specific growth. Recurring shocks lead to large welfare effects and long-term growth effects, directly linked to the persistence of individual shocks. Endogenous savings and shock anticipation both have adaptive effects but do not eliminate differences between impact channels or significantly lower the dissipation time. Accounting for endogenous growth mechanisms increases the effects. We also find strong effects on income shares, important for distributional implications. This work fosters conceptual understanding of impact dynamics in growth models, opening options for links to empirics.

Climate Impacts on Capital Accumulation in the Small Island State of Barbados

“…These values are higher than the 0.2% per year estimated by Acevedo [33] and the study of Moore et al [6], which found output losses for Barbados between 0.20% and 0.25% of GDP in 2050. This is because the model tracks a backlog of unrepaired damaged capital stocks, and cumulative damage increases subsequent GDP losses (see the discussion in [19]). Without anticipation, mean losses are higher still, on the order of 4% by 2050.…”

“…Such models predict that depreciation rate shocks will have very little effect on economic output [45,46]. In "New Keynesian" models [47], where actors may not respond rapidly to new information, or an RBC model in which actors do not take climate shocks into account [19], depreciation rate shocks can produce an effect. In the model developed in this paper, when accurately anticipated, depreciation rate shocks from climate events can be accounted for in the design of physical capital, but as noted above, expected damage may differ from realized damage, either because of the particular sequence of storm events or because the climate is changing in ways that economic actors did not anticipate.…”

“…Furthermore, we differ from FUND and DICE by representing climate damage to capital stocks rather than as a loss in GDP. As noted by Piontek et al [19], loss of inputs to production have different effects than loss of outputs. The inclusion of adaptive behaviors and the loss of physical capital also distinguishes the study from that of Moore et al [6], who applied RICE, the regional version of the DICE model, to a study of climate impacts in the Caribbean.…”

“…Indeed, at least in a large continental economy like the US, emigration of wealthy households from impacted communities has a measurable impact on the level of economic activity [22]. Nevertheless, damage to productive capital stocks ("capital stock shocks" see [19]) does occur, can be expected to affect long-term performance, and should be accounted for in growth models [23]. Moreover, under climate change, events that were rare under historical climate conditions are becoming more frequent, and they are expected to become even more common as the climate continues to change [24,25].Our approach is seen as an extension of the temperature-dependent depreciation rate introduced by Fankhauser and Tol [26] or the greenhouse gas concentration-dependent depreciation rate used by Rezai et al [10].…”

The economic implications of using a truly preindustrial climate baseline

“…However, while using the core results for the climate-induced pressures on economic growth in each year, we additionally assume that the resulting GDP losses are fully recovered in the end of each year and the economy returns to its original trajectory. Termed as level effects, this approach is known to give a more conservative estimate for climate impacts compared to growth effects, when the lost GDP is never recovered (Burke et al, 2015;Piontek et al, 2018). Current data suggests that both types of economic responses to rising temperatures are possible depending on a country's socio-economic and climatic conditions (Burke et al, 2015;Newell et al, 2018;Piontek et al, 2018).…”