The economic impact of weather and climate Richard S.J. Tola,b,c,d,e,f,1,∗ aDepartment of Economics, University of Sussex, Falmer, United Kingdom bInstitute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands cDepartment of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands dTinbergen Institute, Amsterdam, The Netherlands eCESifo, Munich, Germany fPayne Institute for Earth Resources, Colorado School of Mines, Golden, CO, USA Abstract I propose a new conceptual framework to disentangle the impacts of weather and climate on economic activity and growth: A stochastic frontier model with climate in the production frontier and weather shocks as a source of technical inefficiency. I test it on a sample of 160 countries over the period 1950-2014. Results reconcile inconsistencies in previous studies: climate determines production possibilities in both rich and poor countries, whereas weather anomalies enhance inefficiency only in poor countries. In a long-run perspective, the climate effect dominates over the weather effect: simulations suggest that, in the worst-case scenario with unmitigated warming, climate change will curb global output by 13% by 2100, and that a large share of these damages would be avoided if warming were limited to 2◦C. Keywords: climate change; weather shocks; economic growth; stochastic frontier analysis JEL codes: D24; O44; O47; Q54 ∗Jubilee Building, BN1 9SL, UK Email address:
[email protected] (Richard S.J. Tol) URL: http://www.ae-info.org/ae/Member/Tol_Richard (Richard S.J. Tol) 1Marco Letta expertly assisted with data collection and regressions. Peter Dolton, Jurgen Doornik, Bill Greene, David Greene, David Hendry, Andrew Martinez, Pierluigi Montalbano and Felix Pretis had excellent comments on earlier versions of this work.