Monday, February 1, 2010

Pindyck, "Modeling the Impact of Warming in Climate Change Economics"

Robert S. Pindyck has an interesting new contribution to the National Bureau of Economic Research Working Paper Series, available here (gated version), in which he argues that economic models of climate change should focus on the effects of warming on the growth rate rather than the overall level of GDP. Here is the abstract:
Any economic analysis of climate change policy requires some model that describes the impact of warming on future GDP and consumption. Most integrated assessment models (IAMs) relate temperature to the level of real GDP and consumption, but there are theoretical and empirical reasons to expect temperature to affect the growth rate rather than level of GDP. Does this distinction matter in terms of implications for policy? And how does the answer depend on the nature and extent of uncertainty over future temperature change and its impact? I address these questions by estimating the fraction of consumption society would be willing to sacrifice to limit future increases in temperature, using probability distributions for temperature and impact inferred from studies assembled by the IPCC, and comparing estimates based on a direct versus growth rate impact of temperature on GDP.
Pindyck finds that switching the focus from the effect of warming on GDP to the rate of growth, which he argues is appropriate in any case, reduces the aggregate willingness-to-pay for mitigation, and therefore does not support stringent abatement policies. He recognizes, however, that under more dire estimates of warming and consequence impacts, greater aggregate willingness-to-pay would support more stringent climate policies.

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