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GTAP Resource #4350

"On the macro-economic impacts of climate change under cognitive limitations"
by Gohin, Alex and Ruixuan Cao

Available assessments of the future economic impacts of the climate change are still highly divergent. Estimates of the average yearly welfare impact of the climate change range from an optimistic increase of the world GDP by 2.5 per cent to a pessimist decrease by as much as 20 per cent. Many modeling assumptions contribute to these different figures, such as the highly disputed discount rate used in standard Cost Benefit Analysis (CBA) to balance future impacts relative to current expenditures. These economic assessments are now mostly performed within stochastic contexts. But although the sources, extent and physical impacts of the future climate change are highly uncertain, available dynamic economic assessments implicitly assume that economic agents perfectly know them. Perfect foresight, rational expectations or active learning are standard assumptions underlying simulated results. To the contrary, this paper builds on the assumption that economic agents may suffer for a while from limited knowledge about the average and variability of physical impacts of climate change. Using a world dynamic and stochastic general equilibrium model, our simulation results show that identifying the average physical impact is much more crucial than its variability. This finding is robust to the level of risk aversion of economic agents. The rate of pure time preference of economic agents more significantly affects the economic impacts. We also find that the value of information is positive but may incorrectly appear negative in the short to medium run.


Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Gohin, A. (4/1/2014)
Updated: Gohin, A. (4/1/2014)
Visits: 1,560
- Dynamic modeling
- Climate impacts
- Not Applicable

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