Global economic impacts of climate shocks, climate policy and changes in climate risk assessment

80 Pages Posted: 1 Apr 2021

See all articles by Roshen Fernando

Roshen Fernando

The Australian National University; Centre of Excellence in Population Ageing Research (CEPAR); Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy

Weifeng Liu

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Warwick J. McKibbin

Australian National University

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2021

Abstract

This study assesses the global economic consequences of climate-related risk in three broad areas: (1) the macroeconomic impacts of physical climate risk due to chronic climate change associated with global temperature increases and climate-related extreme shocks; (2) the macroeconomic effects of climate policies designed to transition to net zero emissions by 2050 (transition risk); and (3) the potential macroeconomic consequences of changes in risk premia in financial markets associated with increasing concern over climate events.
We consider four widely used climate scenarios (Representative Concentration Pathways, or RCP), and identify the physical damage functions due to chronic climate risks. The chronic climate risks include sea-level rise, crop yield changes, heat-induced impacts on labor, and increased incidence of diseases. We also estimate the future incidence of climate-related extreme events, including droughts, floods, heat waves, cold waves, storms and wildfires, based on climate variable projections under the climate scenarios.
After translating physical climate shocks into economic shocks to labor force and sectoral productivity, we investigate the macroeconomic consequences under the climate scenarios using the G-Cubed model. The results demonstrate that physical climate risk is likely to cause large economic losses in all RCP scenarios, both through chronic climate change and extreme climate shocks.
We then explore the impact of country-specific economy-wide carbon taxes as a representative policy action to drive the global economy to achieve net-zero emissions by mid-century. Transition risks vary according to the ambition and the design of policies to reduce emissions. The results demonstrate that there can be potentially significant costs associated with policies to reduce emissions, and the costs differ across sectors and across countries.
We also address whether changes in climate risk perceptions can significantly impact the real economy through changes in risk premia in financial markets. We calculate shocks to financial risk premia based on relationships between historical climate shocks and changes in financial market risk premia. We apply these shocks to risk premia under the RCP scenarios and find that the cost of rising risk premia can be of a magnitude consistent with historical experience. The cost appears to be smaller than the economic costs of changes in physical climate risk and transition risk.

Keywords: Climate change, Extreme events, Climate shocks, Climate risk, Macroeconomics, DSGE, CGE, G-Cubed

JEL Classification: C51, C53, C54, C55, C68, F41, Q51, Q54

Suggested Citation

Fernando, Roshen and Liu, Weifeng and McKibbin, Warwick J., Global economic impacts of climate shocks, climate policy and changes in climate risk assessment (April 1, 2021). CAMA Working Paper No. 37/2021, Available at SSRN: https://ssrn.com/abstract=3817111 or http://dx.doi.org/10.2139/ssrn.3817111

Roshen Fernando

The Australian National University; Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Canberra, Australian Capital Territory 2601
Australia

Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Weifeng Liu

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Crawford School of Public Policy
Canberra, Australian Capital Territory 2601
Australia

HOME PAGE: http://https://cama.crawford.anu.edu.au/

Warwick J. McKibbin (Contact Author)

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

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