The Importance of External Weather Effects in Projecting the Economic Impacts of Climate Change

Abstract

The future impact of climate change on the world economy is a topic of great importance and uncertainty. Previous models predict only mild aggregate damages and that some countries will be unaffected or may even benefit. This article demonstrates that these results rely on the restrictive assumption that economies are unaffected by weather shocks in other countries, which leads to overly optimistic predictions of impacts from global weather shocks. Relaxing this assumption in existing models leads them to predict catastrophic economic impacts from significant climate change, where all countries are badly affected to different degrees. This article also outlines the difficulty in forming plausible predictions given that projections of future climate change produces weather draws that lie wholly outside historical experience. The results have fundamental implications for damage functions inside Integrated Assessment Models, and also explains the strong contrast between economics and the physical sciences when discussing severe climate change.

Keywords: Environmental Economics, Economic Growth, Trade, Weather, Forecasting

JEL Classification: C23, C51, C53, O44, Q54