Shocking Climate: Identifying Economic Damages from Anthropogenic and Natural Climate Change

We study dynamic interactions of economic activity and climate using an economic-climatic system that involves the global distribution of temperature anomalies as a functional variable in addition to global aggregate variables representing economic activity, climate forcings from greenhouse gases and tropospheric aerosols resulting from sulfur dioxide emissions. We identify three types of anthropogenic shocks and a multi-dimensional natural climate variation shock, as well as external solar and volcanic shocks. The multi-dimensional natural shock has a large but ephemeral effect on climate but a relatively small effect on economic activity. In contrast, a carbon-based anthropogenic shock is historically the most important driver of both economic growth and climate change. By isolating the channel of shocks through climate onto economic activity, we distinguish between the direct effect (growth) and indirect effect (climate-induced economic damage) of anthropogenic shocks. Relative to an average growth rate of 2.50% per year, we find that the average growth rate would have been as high as 2.64% without damages from anthropogenic shocks. Because of its effect on climate, the multi-dimensional natural shock has a more volatile though less persistent climate-induced effect on economic activity than do the balance of the three anthropogenic shocks.