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Climate Change and Economic Growth over The Last Half Century

Higher temperatures have large negative effects on economic growth in poor countries.

In Climate Change and Economic Growth: Evidence from the Last Half Century (NBER Working Paper No. 14132), researchers Melissa Dell, Benjamin Jones, and Benjamin Olken use year-by-year fluctuations in temperature and precipitation over the past half century to examine how these variables affect aggregate economic activity. Using data for 136 countries over the period 1950 to 2003, the authors find that higher temperatures have large negative effects on growth - but only in poor countries. For such countries, the results suggest that a temperature increase of one degree Celsius for one year reduces economic growth by about 1.1 percentage points. Analysis of decade or longer climate shifts shows similar, substantially negative effects of higher temperature on growth in poor countries.

The researchers note that temperature could affect economic activity in poor countries in two ways: by influencing the level of output, for example through crop yields, or by influencing the growth rate of output, for example by affecting investment or the institutions that influence productivity growth. Their results show persistent effects of temperature shocks, suggesting that higher temperatures reduce growth rates, not simply the level of output.

Underlying these aggregate effects, there is also evidence that higher temperatures substantially reduce agricultural output, industrial output, investment, innovation, and political stability. These broad ranging effects suggest the importance of various channels not usually considered in assessments of the potential impact of climate change, and help to explain how temperature might affect not simply the level of output, but also growth rates in poor countries.

These findings have implications for long-standing debates about the role of climate in economic development, and for more recent debates about the possible impact of future climate change. By showing that changes in temperature have large effects on growth in poor countries, the authors demonstrate that climate is still relevant for economic development. Looking forward, they show that, even allowing for rapid adaptation to climatic change, the negative impacts of climate change on poor countries may be larger than previously thought. Overall, the findings suggest that future climate change may substantially widen income gaps between rich and poor countries.

-- Matt Nesvisky