Why economic dynamics matter in assessing climate change damages: Illustration on extreme events

Abstract

Extreme events are one of the main channels through which climate and socioeconomic systems interact, and it is likely that climate change will modify the probability distribution of the losses they generate. The long-term growth models used in climate change assessments, however, cannot capture the effects of such shortterm shocks. To investigate this issue, a non-equilibrium dynamic model (NEDyM) is used to assess the macroeconomic consequences of extreme events. This exercise allowed us to define the economic amplification ratio, as the ratio of the overall production loss due to an event to its direct costs. This ratio could be used to improve the cost-benefit analysis of prevention measures. We found also that, unlike a Solow-like model, NEDyM exhibits a bifurcation in GDP losses: for each value of the capacity to fund reconstruction, GDP losses remain moderate if the intensity and frequency of extremes remain under a threshold value, beyond which GDP losses increase sharply. This bifurcation may partly explain why some poor countries that experience repeated natural disasters cannot develop. Applied to the specific issue of climate change, this model suggests that changes in the distribution of extremes may entail significant GDP losses in absence of specific adaptation. It suggests, therefore, that to avoid inaccurately low assessments of damages, researchers must take into account the distribution of extremes instead of their average cost and make explicit assumptions on the organization of future economies.

An assessment of the potential impact of climate change on flood risk in Mumbai

“…Direct losses, the costs of replacing and reconstructing damaged buildings and infrastructure, account for only a fraction of total cost of a disaster, particularly in the case of large-scale events (Tierney 1997;Pielke and Pielke 1997;Lindell and Prater 2003;Hallegatte et al 2007). After an event, the total economic costs can be amplified through: (1) spatial or sectoral diffusion of direct costs into the wider economic system over the short-term (e.g.…”

Impacts of Natural Disasters on a Dynamic Economy

“…In the second part, we summarize NEDyM modifications used to account for external shocks [Hallegatte et al, 2007].…”

“…In this research-and-review paper, we set out to combine three strands of research: (i) the formulation and study of a non-equilibrium dynamic model (NEDyM) of endogenous business cycles (EnBCs) ; (ii) the application of this NEDyM model to the investigation of the impact of global warming and extreme events on the economy [Hallegatte et al, 2007;; and (iii) the quantitative extraction of business cycles from macroeconomic data [Groth and Ghil , 2011;Groth et al, 2012], including the validation of the FDT hypothesis on the functioning of the U.S. economy.…”

“…investigated how the state of the economy may influence the consequences of natural disasters. In doing so, these authors introduced into NEDyM the disaster-modeling scheme of Hallegatte et al [2007], in which natural disasters destroy the productive capital through a modified production function (see Appendix A). Furthermore, to account for market frictions and constraints in the reconstruction process, the reconstruction expenditures are limited.…”

Flood Risks, Climate Change Impacts and Adaptation Benefits in Mumbai

“…Direct losses, the costs of replacing and reconstructing damaged buildings and infrastructure, account for only a fraction of total cost of a disaster, particularly in the case of large-scale events (Tierney, 1995;Pielke and Pielke, 1997;Lindell and Prater, 2003;Hallegatte et al, 2007). After an event, the total economic costs can be amplified through: (i) spatial or sectoral diffusion of direct costs into the wider economic system over the short-term (e.g.…”