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Understanding Climate Damages: Consumption versus Investment

Author

Listed:
  • Casey, Gregory

    (Williams College)

  • Fried, Stephie

    (Arizona State University)

  • Gibson, Matthew

    (Williams College)

Abstract

Existing climate-economy models use aggregate damage functions to model the effects of climate change. This approach assumes climate change has equal impacts on the productivity of firms that produce consumption and investment goods or services. We show the split between damage to consumption and investment productivity matters for the dynamic consequences of climate change. Drawing on the structural transformation literature, we develop a framework that incorporates heterogeneous climate damages. When investment is more vulnerable to climate, we find short-run consumption losses will be smaller than leading models with aggregate damage functions suggest, but long-run consumption losses will be larger. We quantify these effects for the climate damage from heat stress and find that accounting for heterogeneous damages increases the welfare cost of climate change by approximately 4 to 24 percent, depending on the discount factor.

Suggested Citation

  • Casey, Gregory & Fried, Stephie & Gibson, Matthew, 2021. "Understanding Climate Damages: Consumption versus Investment," IZA Discussion Papers 14974, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14974
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    Cited by:

    1. Burda, Michael C. & Zessner-Spitzenberg, Leopold, 2024. "Greenhouse Gas Mitigation and Price-Driven Growth in a Solow-Swan Economy with an Environmental Limit," IZA Discussion Papers 16771, Institute of Labor Economics (IZA).
    2. Curtis, Chadwick C. & Lugauer, Steven, 2025. "Waste-heat and economic growth in the very long run," Economics Letters, Elsevier, vol. 254(C).
    3. Li, Lei & Zheng, Yifan & Ma, Shaojun & Ma, Xiaoyu & Zuo, Jian & Goodsite, Michael, 2025. "Unfavorable weather, favorable insights: Exploring the impact of extreme climate on green total factor productivity," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 626-640.
    4. Wang, Fangzhi & Liao, Hua & Tol, Richard S.J., 2025. "Baumol’s climate disease," European Economic Review, Elsevier, vol. 180(C).
    5. Liao, Hua & Ye, Huiying, 2023. "Endogenous economic structure, climate change, and the optimal abatement path," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 417-429.
    6. Wang, Hongtian & Shan, Jinghan & Zhang, Xuemei & Nie, Pu-yan & Wang, Chan, 2025. "Labor force allocation changes triggered by extreme heat events—Evidence from China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 2142-2160.

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    Keywords

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    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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