Conference Agenda

Climate change poses physical risks to the environment and the economy. This paper examines approaches to incorporating a limited set of physical climate risks into economic models and estimating their macroeconomic impacts across different climate scenarios. Using a global dynamic general equilibrium model (G-Cubed), the analysis covers the global economy with a particular focus on the United States. Macroeconomic projections associated with climate-related productivity shocks are part of a wider endeavor to understand the climate challenge and the relative merits of potential policy responses.

Using estimates from other studies, we first represent climate change effects as productivity shocks and project their general equilibrium effects in G-Cubed. We consider four paths of productivity shocks: three global Shared Socioeconomic Pathways (SSP) scenarios that reduce total factor productivity and one US-only scenario that increases productivity in the agricultural sector and lowers labor productivity across other sectors. We also determine the path of the equity risk premium that produces reductions in US GDP that match SSP2-4.5 through 2060. Finally, we illustrate an alternative approach in which climate change is represented by a reduction in the rate at which physical capital provides capital services in production.

Our results suggest that the impacts of all scenarios on macroeconomic projections in the United States are relatively modest through 2060. GDP reductions from the climate change impacts modeled range from 0.2% to 0.5% relative to a no-climate-change baseline, depending on the scenario. There are also small effects on US employment, international trade, and capital flows. The shocks to labor productivity in individual sectors produce significantly more severe impacts than the aggregate shocks to TFP. GDP losses in the reduction in sectoral labor productivity calibrated to SSP2-4.5 are roughly equivalent to those of the most severe TFP reductions of SSP5-8.5. Also, the GDP impacts in SSP2-4.5 are roughly equivalent to an increase in the equity risk premium of 1.75 percentage points by 2060. The results also indicate significant differences across countries. Overall, GDP impacts of these scenarios are positive for several regions in the Global North in the near term, driven by productivity gains and international capital flows.