The Macroeconomic Impact of Climate Change: Global vs. Local Temperature

By Adrien Bilal and Diego R. Känzig
21 / 05 / 2024
A man watering a vegetable garden belonging to an agricultural cooperative located a few kilometres from the capital, Ouagadougou in Burkina Faso. Photo credit: Luca Prestia via iStock.

This paper estimates that the macroeconomic damages from climate change are six times larger than previously thought. We exploit natural variability in global temperature and rely on time- series variation. A 1°C increase in global temperature leads to a 12% decline in world GDP. Global temperature shocks correlate much more strongly with extreme climatic events than the country-level temperature shocks commonly used in the panel literature, explaining why our estimate is substantially larger. We use our reduced-form evidence to estimate structural damage functions in a standard neoclassical growth model. Our results imply a Social Cost of Carbon of $1,056 per ton of carbon dioxide. A business-as-usual warming scenario leads to a present value welfare loss of 31%. Both are multiple orders of magnitude above previous estimates and imply that unilateral decarbonization policy is cost-effective for large countries such as the United States.

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