The impact of climate change and energy transition on production: Are the results sensitive to spillover effects?

The literature presents mixed evidence on the effects of climate change and the energy transition on production. Using a sample of 32 countries from 1999 to 2022, with both monthly and annual data, we argue that the results are sensitive to the characteristics and assumptions of the econometric models employed, particularly due to the omission of spillover effects from national energy and environmental policies. We employ three models: panel data, SVAR, and GVAR. While panel data allows for causality analysis, it does not account for spillover effects. GVAR addresses this limitation by integrating individual models within a single system, enabling the diffusion of shocks across countries. Given that energy transition and climate change transcend national borders, their effects propagate globally, influencing different regions. This study seeks to bridge that gap. Our findings reveal that: i) Climate change negatively impacts production, ii) temperature anomalies indirectly affect production by triggering changes in financial markets and international prices (e.g., oil and agricultural prices), iii) among energy transition proxies, renewable energy consumption (a demand-side variable) has a stronger impact on production than the energy matrix (a supply-side variable), and iv) the energy policies of the U.S. and the Eurozone significantly influence production in other countries. These results underscore the importance of aligning econometric model characteristics with the theoretical foundations of the investigation, as well as the potential for international cooperation in policy design. Finally, our study advances the literature by demonstrating the sensitivity of climate change's impact on production to model specifications. In particular, we highlight the critical role of spillover effects, which should not be overlooked in empirical analyses.