A Known Unknown: The Future Impact of Climate Change on the Global Economy
The future impact of climate change on the world economy is a topic of great importance and uncertainty. While the physical sciences consider severe climate change an existential risk, economic models predict that it will have a relatively minor impact. This article shows that by incorporating the interconnectedness of the global economy when estimating the relationship between growth and weather shocks, economic models can predict catastrophic economic impacts from severe climate change. It provides evidence that restrictive assumptions used in previous models have led to an understating of the potential economic damage of climate change, and the conclusion that some countries may benefit from climate change. Lastly, the article reveals the extreme difficulty in identifying the effect of severe climate change, given that weather projections for these scenarios lie far outside the historical range of weather that are used in econometric regressions.