Accounting for Extreme Events in the Economic Assessment of Climate Change
AbstractExtreme events are one of the main channels through which climate and socio- economic systems interact. It is likely that climate change will modify their probability distributions and their consequences. The long-term growth models used in climate change assessments, however, cannot capture the effects of short-term shocks; they thus model extreme events in a very crude manner. To assess the importance of this limitation, a non-equilibrium dynamic model (NEDyM) is used to model the macroeconomic consequences of extreme events. Its conclusions are the following: (i) Dynamic processes multiply the extreme event direct costs by a factor 20; half of this increase comes from short-term processes; (ii) A possible modication of the extreme event distribution due to climate change can be responsible for significant GDP losses; (iii) The production losses caused by extreme events depend, with strong non-linearity, both on the changes in the extreme distribution and on the ability to fund the rehabilitation after each disaster. These conclusions illustrate that the economic assessment of climate change does not only depend on beliefs on climate change but also on beliefs on the economy. Moreover, they suggest that averaging short-term processes like extreme events over the five- or ten-year time step of a classical long-term growth model can lead to inaccurately low assessments of the climate change damages.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2005.1.
Date of creation: Jan 2005
Date of revision:
Climate change; Extreme events; Economic impacts;
Find related papers by JEL classification:
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-03-13 (All new papers)
- NEP-GTH-2005-03-13 (Game Theory)
- NEP-MIC-2005-03-13 (Microeconomics)
- NEP-NET-2005-03-13 (Network Economics)
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