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Critiques of macroeconomic models of climate change

The macroeconomic models that we have elaborated on (such as the Nordhaus or Stern or Weitzman models) rely heavily on a mechanical model where individuals do not modify their behavior based on experience or learning. However, we know that people do not behave the same way under all conditions. The impact ofclimate change is very different depending on the level of development of a country. Dell, Olken, and Jones (2010)[1] show the following:

  • (1) Higher temperatures substantially reduce economic growth in poor countries (countries with less than the median per capita income in the world) but have no effect in OECD countries. There is negligible impact from changing precipitation.
  • (2) Higher temperatures reduce growth rates in poor countries, rather than just the level of output.
  • (3) Higher temperatures affect the poor countries in a number of different dimensions by reducing agricultural output, industrial output, and aggregate investment. In addition, higher temperatures also increase political instability.

In the context of environmental economics, the inequality within a country looms larger.[2] Standard neoclassical models of economic growth (maximizing intertemporal utility function subject to intertemporal budget constraints) may not be suitable for studying inequality within a country. Thus, it requires a different type of modeling.[3]

There is a huge difference between most developed and most developing countries in terms of the importance of the agricultural sector. For most developing countries, agriculture still constitutes a large sector. Thus, any impact on agriculture will affect a large section of the population. For example, in India, half the population is engaged in the agricultural sector. Therefore, climate change impacts on agriculture will affect half of India directly. On the other hand, in a country like the US, where less than 2 percent of the population directly relies on agriculture, any negative impact of climate change on agriculture will be far less disruptive. The energy sector will be affected in all countries. So will the housing market. All of them will add up to macroeconomic effects of significant magnitude.

The needs of small island nations such as Vanuatu or Maldives are much more immediate. These island nations could be wiped off the map with a relatively small rise in the sea level. On the other hand, other nations such as Bangladesh will be hit by the rise of frequency and severity of flooding (either through the rise of the sea level or by the change in the pattern of rainfall across the country).

Jason Sampson[4] has designed a climate disaster vulnerability index (CDVI). He created a cylindrical map of the world (rather than Eckert type IV or type VI). It shows that those who are likely to be the most vulnerable to climate change are populations living in low-latitude, hot regions of the world, like central South America, the Arabian Peninsula, and much of Africa (all developing countries), and relatively less so in India and China—the two most populous nations on the planet.

  • [1] Melissa Dell, Benjamin F. Jones, Benjamin A. Olken, “Temperature and Income: ReconcilingNew Cross-Sectional and Panel Estimates” (2009) 99(2) American Economic Review 198.
  • [2] World Bank, WorldDevelopment Report2006: EquityandDevelopment (World Bank, Washington2006).
  • [3] Daron Acemoglu and Melissa Dell, “Productivity Differences Between and Within Countries”(2010) 2(1) American Economic Journal: Macroeconomics 169.
  • [4] Jason Samson etal., “Geographic Disparities and Moral Hazards in the Predicted Impacts ofClimate Change on Human Populations” (2011) 20 Global Ecology and Biogeography 532.
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