Economic damage of climate change: How far is it from the physical damage?

Costs of climate change in integrated assessment models (IAMs) are in most cases based on a fixed relationship between a change in mean temperature and a change in the value added. The consequences of economic behavior, measures taken to adapt specifically to expected climatic changes and resulting market effects are thereby omitted. This chapter shows how attention to these factors affects estimates of the costs of climate change. With a given physical effect on grain yield as the point of departure, we show how the economic impacts depend on assumptions related to adaptation within the agricultural sector throughout the world. In an average 2100 climate, the economic impacts of a 2.3-percent reduction in the productivity of grain under present economic conditions ranges between 0 to 2.3 percent of the sum of GDP in all world regions, depending on opportunities for adaptation, but between -25 and 70 percent of the GDP on regional levels. Changes in relative prices across sectoral products modify considerably the economic damage estimated at constant prices. The regional GDP calculated at purchasing power parities (PPP) used in many studies tends to be too optimistic to indicate the economic damages particularly in developing countries. Hence, GDP deflated at local consumer price index is recommended to indicate the regional rather than global economic damages in these countries. The regions depending heavily on agriculture are suggested to reduce their dependence on agriculture during the economic development to be better prepared for the potential economic consequences of climate change.