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

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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.

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Notes

  1. In case of a Cobb–Douglas production function (as in the DICE model), however, total factor productivity enhancing technological progress can be transformed to an equivalent labor-enhancing representation. With a Cobb–Douglas production function, a balanced growth path can therefore exist if technological change increases TFP.

  2. The convergence dynamics are as expected from the Ramsey model (see Barro and Sala-i-Martin 2004) and the results also show the different transition and long-run dynamics depending on the persistence of shocks (see, e.g. King and Rebelo 1999 for simulations of single TFP shocks with different degrees of persistence in the RBC framework).

  3. Note that the quantitative comparison of impact channels is inherently problematic because different concepts of damage functions have to be calibrated consistently with a clear and operational definition based on the same point. The calibration definition applied here applies a static criterion to replicate a GDP loss at a certain temperature increase. However, the different impact channels lead to vastly different transient results on GDP as temperature increases over time. Alternatively, a definition considering the transient effects could be formulated, but there are no estimates available consistent with such a transient definition. Therefore, future research on climate impact and macroeconomic damages needs to consider the transient features rather than static damages that relate significant temperature increases to significant GDP losses without considering cumulative effects over time.

  4. Thus, the model framework is essentially that of the DICE model with modified production functions and damages with varying biases and persistence. Contrary to the climate DSGE models cited in the introduction, we abstract from uncertainty in damages.

  5. See Carleton and Hsiang (2016) for an extensive review of further references.

Abbreviations

IAM:

Integrated assessment model

CGE:

Computational general equilibrium

BGE:

Balanced growth equivalent

GDP:

Gross-domestic product

CES:

Constant elasticity of substitution

trl:

Trillion

RBC:

Real business cycles

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Acknowledgements

This work was conducted within the project ENGAGE, funded in the framework of the Leibniz Competition (SAW-2016-PIK-1).

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Authors and Affiliations

  1. Potsdam Institute for Climate Impact Research, Telegrafenberg A56, 14473, Potsdam, Germany

    Franziska Piontek, Elmar Kriegler, Anselm Schultes, Marian Leimbach, Ottmar Edenhofer & Nico Bauer

  2. Mercator Research Institute on Global Commons and Climate Change, Torgauer Str. 12, 10829, Berlin, Germany

    Matthias Kalkuhl & Ottmar Edenhofer

  3. Faculty of Economic and Social Sciences, University Potsdam, August-Bebel-Strasse 89, 14482, Potsdam, Germany

    Matthias Kalkuhl

  4. Technische Universität Berlin, 10612, Berlin, Germany

    Ottmar Edenhofer

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  1. Franziska Piontek
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Piontek, F., Kalkuhl, M., Kriegler, E. et al. Economic Growth Effects of Alternative Climate Change Impact Channels in Economic Modeling. Environ Resource Econ 73, 1357–1385 (2019). https://doi.org/10.1007/s10640-018-00306-7

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