The Potential Impacts of Climate Change on Piketty's Measure of Wealth Inequality

Abstract

Recently, economist Thomas Piketty has used the steady state capital-to-income ratio to track the aggregate wealth to income ratio over the past three centuries and to make predictions about this ratio into the future. Over the last thirty years this ratio has increased to the high levels observed in Europe during the 1700-1900 period. Projections to the end of this century predict that the capital-income ratio will continue to increase due to declining growth rates for productivity and population. A higher capital-to-income ratio indicates increased wealth inequality since the ownership of capital is highly concentrated. In this note a simple integrated assessment model is used to examine the potential impacts of climate change on the capital-to-income ratio over the next two and a half centuries. Damages arising from climate change can affect the capital-to-income ratio and hence wealth inequality over the next two centuries in a more dramatic manner than the impact of financial deregulation has done in the past. Specifically, the capital-to-income ratio will fall if damage from climate change increases the depreciation rate of capital. However, this decline in the capital-to-income ratio is somewhat mitigated if climate change acts to slow labor-augmenting technical progress.