Macroeconomic Economics Effects of Climate Change: Evidence Using Cross- and Within-Country Data

This project consists of two studies investigating the macroeconomic effects of climate change, one using data across 174 countries and the other using within-country and sectoral data from US states.
Global temperatures have increased significantly in the past half century and extreme weather events are becoming more frequent and severe. Climate change is not only affecting low-income countries, but also advanced economies-in September 2017 while Los Angeles experienced the largest fire in its history, Hurricanes Harvey and Irma caused major destruction in Texas and Florida, respectively. A persistent rise in temperature, changes in precipitation patterns and/or more volatile weather events can have long-term macroeconomic effects by adversely affecting labour productivity, slowing investment and damaging human health; something that is usually overlooked in the literature owing to the focus of existing studies on short-term growth effects.
We contribute to the literature by investigating the long-term macroeconomic effects of climate change across 174 countries over the period 1960 to 2014. We link deviations of climate variables (temperature and precipitation) from their historical norms to changes in real output per capita. We estimate the size of income effects across countries; assess whether the effects are temporary or permanent; allow for human activity to also affect climate change; investigate the relative importance of climate change for poor (hot) economies versus rich (cold) countries; and study the channels of impact and the sectors that are affected the most. Also, by using deviations of climate variables from their respective historical norms, while allowing for nonlinearity, we avoid the econometric pitfalls associated with the use of trended variables, such as temperature, in output growth equations in previous studies.
Our results show that a persistent change in climate has a long-term negative effect on per capita GDP growth. Furthermore, we show that our empirical findings pertain to poor or rich, and hot or cold countries alike (albeit to varying degrees) as economic growth is affected not only by persistent increases in temperatures (and the pace with which they are rising) but also by the degree of climate variability. Moreover, our counterfactual analysis suggests that a persistent increase in average global temperature by 0.04 °C per year, in the absence of mitigation policies, reduces world real GDP per capita by more than 7 percent by 2100. On the other hand, abiding by the Paris Agreement goals, thereby limiting the temperature increase to 0.01 °C per annum, reduces the loss substantially to about 1 percent. These effects vary significantly across countries depending on the pace of temperature increases and variability of climate conditions. More importantly, the estimated losses would increase to 13 percent globally if country-specific variability of climate conditions were to rise commensurate with annual temperature increases of 0.04 °C.
In a separate paper, we investigate the long-term macroeconomic effects of climate change across 48 U.S. states over the period 1963-2016 using the same novel econometric strategy which links deviations of temperature and precipitation (weather) from their long-term moving-average historical norms (climate) to various state-specific economic performance indicators at the aggregate and sectoral levels. We show that climate change has a long-lasting adverse impact on real output in various states and economic sectors, and on labour productivity and employment in the United States. Moreover, in contrast to most cross-country results, our within U.S. estimates tend to be asymmetrical with respect to deviations of climate variables (including precipitation) from their historical norms.
Find out more about the Keynes Fund project by Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi here:
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