The persistence of shocks in GDP and the estimation of the potential economic costs of climate change

Integrated assessment models (IAMs) typically ignore the impact of climate change on economic growth, or simply scale down output and hence the entire future growth. In this manner, IAMs typically assume that the shocks caused by climate change impacts dissipate and have no persistence at all, affecting only the period when they occur. Clearly, this could lead to the underestimation of costs of climate change at global, regional, national and local scales. We adopt an empirical approach for analyzing the observed GDP series for different world regions in order to estimate the persistence of shocks on growth. We interpret the direct impact of climate change as such shocks, and use the estimated models to assess the implications for growth. We compare this to the scaling method pioneered by Nordhaus (Nordhaus and Boyer, 2000). A simple version of the widely used PAGE2002 model (Hope, 2006) is applied to conduct a sensitivity analysis varying the degree of a persistence measure in simulated future GDP. It is shown that when a persistence similar to the observed one is chosen, the economic impacts of climate change are considerably larger in comparison to the "zero persistence" implied by the original scaling method. If the persistence of shocks is ignored, as it is currently done by most IAMs, the economic impacts of climate change can be severely underestimated. Results are not sensitive to the selection of the discount rate. Moreover, it is shown that the original scaling method embedded in most IAMs can be interpreted as assuming an autonomous, costless, extremely large and effective (reactive) adaptation capacity.