This study assesses the global macroeconomic consequences of changes in climate risk. The authors explore three broad areas: (1) the macroeconomic impacts of physical climate risk due to chronic climate change associated with global temperature increases and climate-related extreme shocks; (2) the macroeconomic effects of climate policies designed to transition to net zero emissions by 2050 (transition risk); and (3) the potential macroeconomic consequences of changes in risk premia in financial markets associated with increasing concern over climate events.
To assess the macroeconomic consequences of climate change, the authors consider four widely used climate scenarios (Representative Concentration Pathways, or RCP), and identify the physical damage functions due to chronic climate risks from the literature. The chronic climate risks considered in this study include sea-level rise, crop yield changes, heat-induced impacts on labor, and increased incidence of diseases.
The authors also identify methodologies to estimate the future incidence of climate-related extreme events from previous studies. Based on climate variable projections under the climate scenarios, they obtain probabilistic estimates for the future incidence of droughts, floods, heat waves, cold waves, storms and wildfires. Using historical occurrence of the extreme events, they estimate their impacts on labor force, agriculture and electricity generation sectors.