Does climate change affect economic growth?

A question I'm sure you ask yourself several times a day. Well the answer according to Melissa Dell, Benjamin F. Jones, and Benjamin A. Olken in their paper “Climate Shocks and Economic Growth: Evidence from the Last Half Century,” NBER Working Paper 14132, 2008 comes in three parts:

First, higher temperatures have large, negative effects on economic growth, but only in poor countries. In poor countries, we estimate that a 1ºC temperature increase in a given year reduced economic growth in that year by about 1.1 percentage points. In rich countries, changes in temperature had no discernable effect on growth. Changes in precipitation had no substantial effects on aggregate output in either poor or rich countries. When we examine the impact of changes in average temperatures lasting a decade or more rather than annual changes, we find very similar results.

Second, one can distinguish two potential ways temperature could affect economic activity:

1. influencing the level of output, for example by affecting agricultural yields, or
2. influencing an economy’s ability to grow, for example by affecting investments or institutions that influence productivity growth.

The difference between these two types of effects matters when one starts to contemplate permanent changes to temperature: would a 1ºC permanent increase in temperature reduce per-capita GDP by 1.1 percentage points, or would it reduce the growth rate by 1.1 percentage points year after year? We find that higher temperatures reduce the growth rate in poor countries, not simply the level of output. Since even small growth effects have large consequences over time, these growth effects – if they persist in the medium run – imply very large impacts of permanent temperature increases.

Third, we find that temperature affects numerous dimensions of poor countries’ economies in ways consistent with an effect on the growth rate. While agricultural output contractions appear to be part of the story, we find adverse effects of hot years on industrial output and aggregate investment. Moreover, we document that poor countries produce fewer scientific publications in hot years, which suggests that higher temperatures may impede innovative activity. Higher temperatures lead to political instability in poor countries, as evidenced by irregular changes in national leaders. Many of these effects sit outside the primarily agricultural focus of much economic research on climate change and underscore the challenges in building aggregate estimates of climate impacts from a narrow set of channels. These broader relationships also help explain how temperature might affect growth rates in poor countries, not simply the level of output.

For a longer summary of the paper see the column, Does climate change affect economic growth?, at VoxEU.org.