The shocks of climate change on economic growth in developing economies: Evidence from Iran

Abstract

Understanding the economic consequences of climate change has become necessary for economists as evidence indicates that climate is changing and will have detrimental consequences in the upcoming decades, especially in developing countries. Accordingly, this study examines the consequences of climate change on economic growth in Iran located in the mid-latitude belt of arid and semiarid regions on Earth. The present study implements a dynamic integrated assessment model to evaluate the potential impact of climate change on per capita output, per capita consumption, capital per worker, input prices, and welfare over the current century. Two classes of climate change scenarios from CMIP3 (A2 and A1B) and CMIP5 (RCP 4.5, RCP 6.0, and RCP 8.5) under two assumptions of damage function known as “W-damage” and “DS-damage” were examined. In addition, three channels of damage –current production, productivity growth, and capital depreciation–were investigated. In general, the simulation results revealed a significant effect on the selected variables. Nevertheless, the effects were strongly dependent on climatic scenarios and assumptions about the damage function. The consequences of climate change under DS-damage were far more considerable than those under W-damage. The effects of capital damage from climate change were also more significant compared to those of other damage channels. It was revealed that the fall in consumption and welfare was far higher than the corresponding output reduction. When climate change damages from all examined channels were considered, capital per worker was dramatically affected. In particular, under the DS-damage assumption, it tended to decline over the study horizon. This happens while the contribution of capital to production is lower than expected for developing economies.