Knowing the Damages is not Enough: The General Equilibrium Impacts of Climate Change

We show that economies may exhibit a strong endogenous macroeconomic adaptation response to climate change. If climate change induces a structural change to the more productive sector, economies can benefit from climate change though productivities in both sectors are reduced. If climate change causes structural shifts towards the less productive sector, damages are exacerbated by the intersectoral reallocation of labor and intertemporal reallocation of capital. We further assess impacts on labor movement and income distribution. We apply our analytical findings to reasonable parameters for a large set of real-world economies and find that the multiplier effect of climate change due to general equilibrium effects is sizable as it ranges between 50 and 250 percent. Thus, existing assessments of climate change impacts can be severely biased.