Understanding Climate Damages: Consumption Versus Investment

62 Pages Posted: 14 Jan 2022

See all articles by Gregory Casey

Gregory Casey

Williams College

Stephie Fried

Arizona State University (ASU)

Matthew Gibson

Williams College; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2021

Abstract

Existing climate-economy models use aggregate damage functions to model the effects of climate change. This approach assumes climate change has equal impacts on the productivity of firms that produce consumption and investment goods or services. We show the split between damage to consumption and investment productivity matters for the dynamic consequences of climate change. Drawing on the structural transformation literature, we develop a framework that incorporates heterogeneous climate damages. When investment is more vulnerable to climate, we find short-run consumption losses will be smaller than leading models with aggregate damage functions suggest, but long-run consumption losses will be larger. We quantify these effects for the climate damage from heat stress and find that accounting for heterogeneous damages increases the welfare cost of climate change by approximately 4 to 24 percent, depending on the discount factor.

Keywords: climate change, structural transformation, growth

JEL Classification: O130, O440, Q560

Suggested Citation

Casey, Gregory and Fried, Stephie and Gibson, Matthew, Understanding Climate Damages: Consumption Versus Investment (2021). CESifo Working Paper No. 9499, Available at SSRN: https://ssrn.com/abstract=4007781 or http://dx.doi.org/10.2139/ssrn.4007781

Gregory Casey (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

Stephie Fried

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Matthew Gibson

Williams College ( email )

Fernald House
Williamstown, MA 01267
United States

HOME PAGE: http://matthewgibson.org

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/people/affiliates/10269/matthew-gibson

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
4,015
Rank
396,012
PlumX Metrics