Fed study shows impact of climate change on GDP

August 23, 2021|Written by Graham Caswell|Federal Reserve

A US Federal Reserve study examining GDP and temperature data across 124 countries has warned that rising temperatures will have a “very strong” negative impact on GDP growth. Published last month, the working paper examines the distribution of risks to growth, linking them to daily temperature changes. It finds that the economic growth at risk from climate change may be large and may impact the entire distribution of economic activity over time.

While scenario analysis from the Network for Greening the Financial System (NGFS) and other sources has explored the impact of climate change on average growth rates, it does not directly link climate change tail risks to economic activity. In contrast, the Fed study used quantile regressions to specifically examine the distribution of the percent change in real GDP per capita within a country, and then link that data to local daily temperature changes over 30 years. It finds that the impact of temperature on the lower decile of the growth distribution is 50% or more larger than the effect on the central tendency of the distribution.

“The results are stark,” says author and Fed Economist Michael Kiley. “Downside risks to growth are more strongly linked to temperature than the central tendency or upside risks. The differences are sizable.”

It is important to note that the study used only daily temperature data and did not consider the effects of precipitation or other physical effects of climate change. Local temperature data was aggregated to the country level using population weights for areas within a country, and all countries with available weather data were included. Economic data was drawn from the World Bank’s World Development Indicators.

“The empirical relationship between temperature and downside risks to growth is strong,” Kiley concludes. “An increase in average temperature associated with climate change may increase the volatility of economic growth and lead to additional downside skew in year‐to‐year fluctuations.”

The working paper, part of a finance and economics discussion series by the Fed’s Divisions of Research and Statistics and Monetary Affairs, is one of the most substantial pieces of research produced by the Fed. Slow to adapt to the climate emergency, the Fed only recognised climate change as a threat to financial stability last year and has so far confined its climate-related activities to discussion and research.

This page was last updated August 23, 2021

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