Climate risk, institutional quality, and total factor productivity

Abstract

Climate risk severely affects natural ecosystems, and human social systems, especially the economy. Total factor productivity (TFP) has been considered a key factor in explaining long-term economic development. Using the global Climate Risk Index (CRI), we innovatively examine the relationship between climate risk and TFP as moderated by political and economic institutions. We find a negative impact of climate risk on TFP and a regional heterogeneity among countries with different levels of affluence, land area, and population size. The sensitivity of climate risk in poor areas decreases with an increase in affluence, and countries with larger land area and population size are less sensitive to climate risk. In addition, good political and economic institutions can mitigate the negative effects of climate risk, but these moderating effects are not significant in large countries. Finally, we make relevant recommendations for responding to climate risk and improving total factor productivity.