The impact of climate change on economic growth: Evidence from a panel of Asian countries

Abstract

Asia is recognized as one of the most vulnerable regions. This research aims to identify climate change effects on economic growth. It proposes a new and comprehensive perspective to examine the climate-economy nexus in this region and provides an underpinning for assessing the pathway of the growing Asian economy under the SSP climate scenario (CMIP6). We apply a macroeconomic-climate modeling approach with a climate damage function. The damage function, which is based on the temperature anomaly, was examined under three classes of damage severity. The climate change effect has been examined by including the direct effect on the output as the level effect and two more channels, including capital depreciation and productivity growth reduction. The augmented Solow growth model framework that considers different types of capital, including physical, human, social, and environmental capital, was applied. The labor productivity or technology is assumed to depend on trade-related variables, including trade openness, financial development, and foreign aid inflows. Also, in order to test the constant returns to scale assumption, the CES production function, which is the flexible production technology, was used. The study relied on the country-year panel of GDP per capita and other macroeconomic variables such as labor force, capital formation, financial development index, trade openness, and foreign aid gleaned for 1994–2017 to estimate production functions using the GMM estimation method. The climate data on the annual mean temperature and projections of future temperature are based on ICMP6 by 2100 for Asian countries. Based on the CES estimation results, constant returns to scale or Cobb-Douglas production function was adopted. The estimation results show that physical and environmental capital account for the highest contribution to the output per worker. However, the contribution of trade-related variables was found to be insignificant. The projected pathway by 2100 establishes that climate change would significantly reduce Asian output per worker, especially if severe damage function is examined, and climate change stays on the SSP scenario-anticipated trajectory. The output elasticity with respect to temperature under the most severe scenario was obtained −22.80, corresponding to the output per worker reduction of 46.7 percent in 2100. Among the three channels of the climate effect, productivity growth reduction showed the most adverse effect on output. The lower flexibility of the production function that restricts the environmental replacement with other inputs, may lead to a more binding role under growing scarcity conditions. It was also found that labor and technology could contribute dampening the capital damage induced by higher temperatures. From the research results, the findings suggest measures aiming at providing flexible production technology, development of capital-embodied technologies, and lower dependence on environmental capital.