Abstract
Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback effects on the macroeconomy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically, the link between carbon dioxide emission and the frequency of climate related disaster is investigated using a panel data approach. The modeling part then uses a multi-phase dynamic macro model to explore the effects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as a distressed phase, is suitable for studying mitigation and adaptation policies as well as recovery policies.
Highlights
Many recent studies in the economics of climate change have utilized modern statistical and econometric methods to study the links between GDP growth, greenhouse gas (GHG) emission, global warming, and climate-related disasters
To overcome negative externalities, arising from CO2 emissions due to production, there is a strong evolution of debt, associated with co-financing the mitigation and adaptation policies. With this prolonged growth process, we can observe a strong extraction of fossil fuel and a build-up of a stock of CO2 emission
We relate the extensive research on financial crises disasters, and their triggered macro feedback effects, to climate disaster risk, using modeling insight of the former studying the latter
Summary
Many recent studies in the economics of climate change have utilized modern statistical and econometric methods to study the links between GDP growth, greenhouse gas (GHG) emission, global warming, and climate-related disasters. A related study is given by Cantelmo et al (2017) They introduce climate disaster losses in a macroeconomic model as capital losses, implying some long-run persistent effect. Batten (2018) points out that the effects of extreme weather events are very similar to economic shocks: they are mostly unpredictable events with potentially significant macroeconomic consequences In both cases actual output may recover in the short run, but potential capacity is reduced, while physical, public, and human capital will be destroyed. We build on a macro model developed by Bonen et al (2016), Semmler et al (2018b) and Semmler et al (2018a) which allows for studying the issue of large climate-related disaster shocks and climate change policies.
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