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Knowing the Damages is not Enough: The General Equilibrium Impacts of Climate Change

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  • Matthias Kalkuhl
  • Ottmar Edenhofer

Abstract

We show that economies may exhibit a strong endogenous macroeconomic adaptation response to climate change. If climate change induces a structural change to the more productive sector, economies can benefit from climate change though productivities in both sectors are reduced. If climate change causes structural shifts towards the less productive sector, damages are exacerbated by the intersectoral reallocation of labor and intertemporal reallocation of capital. We further assess impacts on labor movement and income distribution. We apply our analytical findings to reasonable parameters for a large set of real-world economies and find that the multiplier effect of climate change due to general equilibrium effects is sizable as it ranges between 50 and 250 percent. Thus, existing assessments of climate change impacts can be severely biased.

Suggested Citation

  • Matthias Kalkuhl & Ottmar Edenhofer, 2016. "Knowing the Damages is not Enough: The General Equilibrium Impacts of Climate Change," CESifo Working Paper Series 5862, CESifo.
    • Handle: RePEc:ces:ceswps:_5862
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp5862.pdf
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    References listed on IDEAS

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    Cited by:

    1. Desbordes, Rodolphe & Eberhardt, Markus, 2024. "Climate change and economic prosperity: Evidence from a flexible damage function," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    2. Kalkuhl, Matthias & Wenz, Leonie, 2020. "The impact of climate conditions on economic production. Evidence from a global panel of regions," Journal of Environmental Economics and Management, Elsevier, vol. 103(C).
    3. Franziska Piontek & Matthias Kalkuhl & Elmar Kriegler & Anselm Schultes & Marian Leimbach & Ottmar Edenhofer & Nico Bauer, 2019. "Economic Growth Effects of Alternative Climate Change Impact Channels in Economic Modeling," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1357-1385, August.

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    More about this item

    Keywords

    dual economy; adaptation; multi-sector growth model; general equilibrium; factor income; distribution;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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