Understanding Climate Damages: Consumption versus Investment? | Stephie Fried

Dr. Stephie Fried is an Assistant Professor, Department of Economics at the W. P. Carey School of Business at Arizona State University.

She will be presenting her paper: “Understanding Climate Damages: Consumption versus Investment?” 

Abstract
We study how climate change will affect the United States economy. Unlike standard climate-economy models, we account for differences in the way that climate affects the production of investment goods and services compared to consumption goods and services.  This is important because climate damages to investment and consumption have different economic consequences. Reductions in consumption immediately decrease economic well-being, but do not have long-run effects. Reductions in investment slow capital accumulation and economic growth, eventually decreasing long-run consumption. To demonstrate the quantitative importance of differential consumption and investment damages, we focus on one prominent climate impact: heat stress. When humans undertake physically intensive tasks, the body must release heat to maintain a safe internal temperature. Rising temperatures from climate change will increase the risk of heat stress, making make outdoor work more. The direct impact of climate damage from heat stress is larger for investment because relatively more investment value added is produced outdoors. Existing climate-economy models assume equal damage to consumption and investment, implying that they overstate the direct impact of climate change on consumption and understate the direct impact of climate change on investment. Thus, these models overstate the short-run reduction in consumption from climate change but understate the long-run reduction in consumption, which depends on the dynamics of  capital accumulation and economic growth.