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Climate change and GDP

Study on climate change and economic output co-authored by Kamiar Mohaddes of Cambridge Judge is cited by US Congressional Budget Office and 25 members of Congress in a letter to the Federal Reserve Board.

Icebergs melting in the Jökulsárlón Glacier Lagoon in Iceland.
Kamiar Mohaddes.
Dr Kamiar Mohaddes

A study co-authored by Associate Professor Kamiar Mohaddes of Cambridge Judge Business School on the effect of climate change on economic output has been cited by the US Congressional Budget Office (CBO) and in a letter to Federal Reserve Board Chair Jerome Powell by 25 members of Congress.

The study, which has just been published in the journal Energy Economics, formed part of the CBO projection that climate change will, on net, reduce average annual real GDP growth by 0.03 percentage points from 2020 to 2050, relative to growth that would occur under the climatic conditions that prevailed at the end of the 20th century.

“That annual growth differential accumulates to a 1% reduction in the projected level of real GDP,” says a Working Paper by Evan Herrnstadt and Terry Dinan of the CBO. “Of that 1% reduction, one-third reflects a continuation of the effect of climate change on real GDP growth in recent years, and two-thirds reflects expected increases in that effect in the future.”

This projection is contained in an Working Paper entitled “CBO’s projection of the effect of climate change on US economic output: working paper 2020-06”, which was followed up in September 2021 by a CBO document outlining how it modelled the effects of climate change on long-term US output.

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The Energy Economics study co-authored by Kamiar, Associate Professor in Economics & Policy at Cambridge Judge, is based on data for 174 countries over the years 1960 to 2014. It finds that per-capita real output growth in all countries – whether rich or poor, hot or cold – is adversely affected by persistent changes in the temperature above or below its historical norm.

The study’s analysis “suggests that a persistent increase in average global temperature by 0.04°C per year, in the absence of mitigation policies, reduces world real GDP per capita by more than 7% by 2100. On the other hand, abiding by the Paris Agreement goals, thereby limiting the temperature increase to 0.01°C per annum, reduces the loss substantially to about 1%.”

Says Kamiar: “These are conservative estimates. For instance, we also investigate the role of climate volatility in determining GDP per capita losses and therefore allow temperature increases to affect the variability of temperature shocks commensurately; in this case the income losses for global economy would almost double, and be more than 13% by year 2100 and under RCP 8.5 (in the absence of mitigation policies). Of course, these are still conservative estimates as we only take into account physical risks and not transition risks”.

Says Kamiar: “Our paper is a key input into the way the CBO thinks about and estimates the effects of climate change on economic activity, and the way they estimate long-run economic projections of the effects of climate change on real income.”

The letter from 25 members of Congress to Federal Reserve Board Chair Jerome Powell, dated 1 April 2021, expresses “concern over the limited action of the Federal Reserve (‘Fed’) to prepare our financial institutions and broader economy for the risk and destabilising impact of climate change.

“While we commend the creation of the Supervision Climate Committee and the Financial Stability Climate Committee, without concrete objectives and measurable changes to the supervisory framework and monetary policy activities carried out by the Fed, we worry progress will be both too slow and insufficient in scale to adequately address the reality of the crisis our economy and our planet face,” says the letter, whose signatories include members of congress Mondaire Jones, Alexandria Ocasio-Cortez, Mark Pocan, Ayanna Pressley, Jamie Raskin and Mark Takano.

The letter specifically cites from the study co-authored by Kamiar the estimate that abiding by the Paris Agreement to limit temperature increase to 0.01°C per year is expected to ‘substantially’ reduce the economic harm caused by climate change.

The study just published in Energy Economics is entitled “Long-term macroeconomic effects of climate change: a cross-country analysis”. The CBO and the congressional letter cited earlier working paper versions of the study, which had been posted on the websites of the National Bureau of Economic Affairs and the International Monetary Fund.

Co-authors of the study are Matthew Kahn of the University of Southern California; Dr Kamiar Mohaddes of Cambridge Judge Business School and King’s College, University of Cambridge; Ryan N.C. Ng of the Faculty of Economics at the University of Cambridge; M. Hashem Pesaran of the University of Southern California and Trinity College, University of Cambridge; Mehdi Raissi of the International Monetary Fund; and Jui-Chung Yang of National Taiwan University.