Abstract
This paper estimates that the macroeconomic damages from climate change are six times larger than previously thought. We exploit natural variability in global temperature and rely on time-series variation. A 1°C increase in global temperature leads to a 12% decline in world GDP. Global temperature shocks correlate much more strongly with extreme climatic events than the country-level temperature shocks commonly used in the panel literature, explaining why our estimate is substantially larger. We use our reduced-form evidence to estimate structural damage functions in a standard neoclassical growth model. Our results imply a Social Cost of Carbon of $1,056 per ton of carbon dioxide. A business-as-usual warming scenario leads to a present value welfare loss of 31%. Both are multiple orders of magnitude above previous estimates and imply that unilateral decarbonization policy is cost-effective for large countries such as the United States.
Generated Summary
This study investigates the macroeconomic impact of climate change by examining the effects of global and local temperature shocks on economic activity. The research employs a time-series approach to analyze the effects of global temperature shocks on Gross Domestic Product (GDP), using a dataset spanning 120 years. It explores the causal effects of temperature shocks on world GDP and uses reduced-form evidence to estimate structural damage functions within a neoclassical growth model. The study also contrasts the impacts of global and local temperature shocks, exploring their implications for extreme weather events. The methodology includes isolating innovations to the temperature process that are orthogonal to their long-run trends, and the study uses local projections from 1960 onwards to map out the dynamic causal effects of global temperature shocks on world GDP. The researchers aim to reconcile differing views on the economic impacts of climate change and assess the costs of climate change.
Key Findings & Statistics
- A 1°C increase in global temperature leads to a 12% decline in world GDP.
- The study estimates that the macroeconomic damages from climate change are six times larger than previously thought.
- The research finds that climate change leads to a present value welfare loss of 31%.
- A Social Cost of Carbon (SCC) of $1,056 per ton of carbon dioxide is calculated. This value is six times larger than the high end of existing estimates.
- When re-estimating the model based on the impact of local temperature shocks, the welfare cost of climate change is 4%, and the SCC is $151/tCO2.
- The 68% confidence interval for the SCC ranges from $723/tCO2 to $1,451/tCO2.
- A one-time transitory 1°C rise in global mean temperature leads to a 2.5% peak productivity decline and a 0.3 percentage point (p.p.) peak rise in the capital depreciation rate.
- Under a business-as-usual warming scenario, global average temperature is expected to increase by 4.4°C by 2100.
- Climate change implies precipitous declines in output, capital, and consumption that exceed 50% by 2100.
- The study indicates that world GDP per capita would be 37% higher today had no warming occurred between 1960 and 2019.
- The impact of global temperature on productivity only implies a welfare loss of 24% and a SCC of $833/tCO2.
- Global temperature shocks predict a large and persistent rise in extreme climatic events.
- The DCC of the United States becomes $211/tCO2.
- The estimated effect is strikingly similar to the estimates from the time series, indicating that the results are robust to accounting for unobserved fixed country characteristics.
- Local temperature shocks lead to a fall in real GDP per capita of approximately -1.5% after 5 years.
- The estimated effects of global temperature shocks are about seven times larger than for local temperature shocks.
- Global temperature shocks lead to a substantial and significant fall in the capital stock and in investment.
- Total Factor Productivity (TFP) falls significantly after global temperature shocks, with an impact effect of about -2%.
- In the longer sample, global temperature shocks are associated with a significant fall in world real GDP, it reaches close to -15% at peak.
- In North America is around -10%, and in Europe around -7%.
Other Important Findings
- Global temperature shocks correlate more strongly with extreme climatic events than country-level temperature shocks.
- The study’s results imply that unilateral decarbonization policy is cost-effective for large countries such as the United States.
- The choice of period is motivated by the geoscience literature, where natural climate variability is driven by multiple phenomena.
- The choice of period is motivated by the geoscience literature. Natural climate variability is driven by multiple phenomena.
- Global temperature shocks are more pronounced in their impacts on economic activity than local temperature shocks.
- The study finds that global temperature shocks lead to much larger economic effects than local temperature shocks.
- Global temperature shocks predict a large increase in the frequency of extreme precipitation and extreme wind speed, while local temperature shocks do not.
- The study indicates that there are meaningful differences in the effects of global temperature shocks.
- The study suggests the effects of climate change are comparable in magnitude to fighting a major war domestically.
- The results also shed light on how much economic growth was missed because of past climate change.
- Many decarbonization interventions cost between $27 and $95 per ton of CO2 abated.
Limitations Noted in the Document
- The study notes that the comparisons are imprecisely estimated and should be interpreted with some caution.
- The long-run effects of temperature are ideally traced out, but the limited sample period prevents this consistently.
- Reverse causality may affect the main output estimate.
- The estimated output response may be specific to a particular period of time.
- The impact of global temperature shocks on country-level GDP varies by baseline temperature.
- The results may be due to pre-trends.
- The analysis remains necessarily silent about distributional effects.
Conclusion
The research demonstrates that climate change has a substantial impact on economic activity, using natural climate variability in global mean temperature to obtain time-series estimates. The findings reveal a persistent decline in global GDP with a 1°C rise in global temperature, alongside a surge in extreme climatic events. The study contrasts the minimal economic effects of local temperature shocks with the significant consequences of global temperature shocks. The study highlights the importance of accounting for the internal persistence of temperature shocks, as it overstates the impact of global warming if not addressed. The research indicates that climate change represents a major threat to the world economy and has salient consequences for decarbonization policy, including a Social Cost of Carbon (SCC) of $1,056/tCO2. The study underscores the difference between the effects of global temperature and local temperature shocks, emphasizing that global temperature shocks lead to substantially larger economic impacts. The findings suggest that policies aimed at decarbonization are cost-effective. Moreover, the study emphasizes that the losses from climate change are comparable to fighting a major war domestically, highlighting the need for urgent action and radical change. The research concludes that substantial climate damages occur over a wide range of specification choices, emphasizing the substantial threat climate change poses to the world economy.