Economics, Impact From Climate Change

Modeling the Economics of Climate Change

Translating changes in future climate into economic impacts measured in monetary terms is a challenging task for a number of reasons. First, in order to understand how climate will affect the global and regional economies, a solid understanding of how the economically relevant dimensions of climate are going to vary at these spatial scales is required. Global climate models (GCMs) provide predictions of the main variables of interest, rainfall and temperature, at increasingly finer temporal and spatial resolution. However, there is much uncertainty remaining over the predicted spatial and temporal distribution of climate across GCMs and emission scenarios. In economic impact evaluation, this uncertainty is amplified by the uncertainty about how individuals, firms, and governments respond to the changing climate directly, and are affected by it indirectly through its impacts on ecosystems.

The economy is a complex system, whose response to a changing climate must be studied using models because, unlike physical scientists, economists lack the opportunity to conduct controlled experiments on this system. Agents in this complex system will sometimes respond in offsetting directions to climate changes. Individuals, for example, respond to incrementally hotter summers and milder winters by cooling more during the hot months and heating less during the cold months, resulting in increased energy consumption in the summers and decreased energy consumption in the winters. Further, responses to the changing climate may be gradual and small or abrupt and sizable. For example, farmers may respond to slightly drier and hotter growing seasons by planting and harvesting earlier in the season. If, however, summers become significantly drier and hotter, farmers may switch crops and/or install irrigation equipment. More households may purchase air conditioners or run existing ones not only during the day, but also during the night. Such adaptions make it extremely difficult to predict impacts on humans and the economy as a whole, because individuals respond to exogenous changes in often-unpredictable ways.

One aspect that is especially difficult to predict is the investment in successful research and devel-opment of new technologies. The energy intensity of most industrialized economies has dropped significantly since World War II. This is partially due to improved energy efficiency of capital, but also due to a structural shift of these economies away from manufacturing toward the production of services. Much of manufacturing, which is thought to be more carbon intensive, has shifted to the developing world. Predicting the future path of energy efficiency and structural composition of the worlds' larger economies is a difficult task. This is especially true for technological innovation, which often progresses in discrete leaps that are virtually impossible to predict.

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