The economic impact of changes in global temperature
In this paper, Bilal and Känzig focus on the impact of global temperature on economic activity. Contrary to previous research that focuses on local temperature shocks and predicts a much weaker rise in extreme temperature, Bilal and Känzig argue that global temperature shocks lead to a large and persistent rise in extreme climatic events that cause more significant economic damage.
- Approach to Temperature Shocks: This paper uses a “top-down” approach, focusing on global temperature shocks. They exploit natural variability in global temperature and rely on time-series variation to estimate the macroeconomic impact. Their methodology emphasizes the correlation between global temperature shocks and extreme climatic events, which they argue is a more direct proxy for climate change impacts than country-level temperature shocks.
- Data and Time Frame: They construct a new climate-economy dataset spanning the last 120 years, using high-resolution gridded land and ocean surface air temperature data from Berkeley Earth and granular reanalysis measures from the Inter-Sectoral Impact Model Intercomparison Project (ISIMIP). Economic data is sourced from the Penn World Tables and the Jordà-Schularick-Taylor Macrohistory database.
- Modeling Techniques: They use a time-series local projection approach to estimate the impact of global temperature shocks on GDP. They then use these reduced-form results to estimate structural damage functions within a standard neoclassical growth model
- Findings: Bilal and Känzig find that a 1°C increase in global temperature leads to a 12% decline in world GDP, which is substantially larger than previous estimates. They also estimate a Social Cost of Carbon (SCC) of $1,056 per ton of CO2 and a present value welfare loss of 31% under a business-as-usual scenario
The Macroeconomic Impact of Climate Change: Global vs. Local Temperature
Authors: Adrien Bilal, Diego R. Känzig
From: Harvard University, Northwestern University
The cross-country economic impact of changes in global temperature
In this paper, Berg et al. decompose a country’s temperature into global and country specific (idiosyncratic) components, then use local projections to estimate the responses of real GDP per capita growth to each temperature component. The authors assume, similarly to the research above, that the global component of temperature shock, reflecting global warming, is permanent while the idiosyncratic component, is transitory.
- Approach to Temperature Shocks: This paper uses local projections to estimate the cross-country distribution of real GDP per capita growth responses to both global and idiosyncratic (country-specific) temperature shocks. They decompose temperature into global and idiosyncratic components and analyze the heterogeneity in responses across different countries.
- Data and Time Frame: They use a panel dataset of 173 countries from 1960 onwards, focusing on the responses of real GDP per capita growth to temperature shocks. Their analysis includes robustness checks with different detrending methods for temperature data.
- Modeling Techniques: They employ local projections to estimate impulse responses and use cross-sectional regressions to investigate the role of country characteristics in explaining response heterogeneity. They control for factors such as latitude, average temperature, economic structure, and development levels.
- Findings: Their findings show that global temperature shocks have negative growth effects for about half of the countries studied, with significant heterogeneity. For instance, all Group of Seven (G7) countries exhibit negative growth responses at longer horizons, while some of the poorest countries show positive responses. The variation in response to global temperature shocks is systematically related to several country-level characteristics. A country’s GDP is more likely to respond positively to a global temperature shock if it is poorer, has grown less rapidly.
GDP and Temperature: Evidence on Cross-Country Response Heterogeneity
Authors: Kimberly A. Berg, Chadwick C. Curtis, Nelson Mark
From: Miami University, University of Richmond, University of Notre Dame
