Global | Climate change, the long term, and the literature

Summary

When considering long-term economic growth, climate change is highly relevant. It is not only about managing the immediate losses from extreme weather events, which after the initial shock are often mitigated through public spending, insurance payouts, and private reconstruction.

Key points

• Key points:
• First, because some policy levers may not be available, as is the case in less developed economies or in more exposed geographies.
• Second, because even if economic activity and employment recover, the stock of natural assets deteriorates—for example, through biodiversity loss: a wildfire eliminates the services a forest provides as a tourist attraction, while droughts or floods destroy natural capital in the primary sector.
• In economic terms, climate change resulting from global warming acts as a negative supply shock that reduces potential GDP—the sustainable productive capacity—by accelerating the depreciation of productive factors and lowering their productivity.
• The economic literature also agrees that policies aligned with an orderly, credible, and early transition to a low-carbon economy, combined with investment in adaptation, can offset physical damages and, with sufficient ambition, have a positive impact on long-term potential GDP.

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