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

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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