Climate Change and Economic Activity: Evidence From US States

Research published by Oxford Open Economics shows that deviations from historical climate norms in the US have a “long-lasting adverse impact” on real output, growth, labour productivity and employment at both state and sector levels.

Academics from Cambridge University, the International Monetary Fund (IMF), the University of Southern California and the National Taiwan University developed a research strategy that links long-term moving averages from historical weather norms to state-specific economic performance indicators across 48 US states between 1963 and 2016.

In the paper, the authors present an innovative econometric approach for studying the long-term macroeconomic effects of climate change. The analysis is aggregated by state, sector and impact channels, and the methodology accounts for asymmetrical weather events, non-linearity, adaptation, and bi-directional feedbacks between growth and climate change.

The results show that rising temperature may lead to a “permanent negative impact on state-level output growth”. The authors estimate 0.01°C annual increases above historical norms will lower average per-capita real Gross State Product (GSP) growth by 0.0273% annually.

All 48 US states were found to have experienced statistically significant temperature rises, with an average 0.026°C annual increase that considerably exceeded the global average of 0.018°C.

The results also discover a statistically significant and negative relationship between rising and falling precipitation and state-level economic activity. The authors state that previous climate studies that use national rainfall averages have underestimated these effects due to the varied impact of climate change on precipitation across the states.

Swings in temperature and precipitation are shown to have adverse long-term economic effects. They result in more frequent and extreme weather events with statistically significant negative impacts on growth rates of real GSP,  labour productivity and employment across all specifications.

The sector-specific analysis shows that climate impact is broad-based— with each of the 10 sectors affected by at least one of the four climate variables, and output growth in the manufacturing industry adversely affected by all four.

The results also confirm previous findings by the IMF that adaptation can halve climate change’s economic damage. Authors say that faster adaptation can significantly reduce income losses across the US states, especially if combined with mitigation, but current adaptation efforts have limited macroeconomic impact.