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The macroeconomics of climate change: a review of existing techniques to model the impacts of climate change and the role of adaptation - CA0402

The project surveys state-of-the-art research on the macroeconomic effects of climate change on advanced economies like the UK, and how adaptation can help to manage these.
Over the last decade a technical literature has emerged which engages with the various potential macroeconomic effects of climate change. Models applying a wide variety of methodological approaches have been developed in an attempt to predict and quantify the impact of global warming on the economy. While significant progress has been made, the literature remains inaccessible to a non-specialist audience.
Two recent developments have indicated that a more thorough and widespread understanding of these models could greatly improve environmental and economic decision making. First, it has become clear that whether or not these models take into account the existence of ‘disaster’ scenarios – high impact, low probability events – can greatly affect the extent to which costly ameliorative actions are desirable. Second, as the reality of significant global warming draws closer, the potential of adaptation for minimising the macroeconomic and social damage of climate change has become a key policy concern.
The project will culminate in the production of a report that collects the relevant evidence in a comprehensive and accessible clear document, aiding future policy making. It will also assess how fit for purpose the evidence is in showing the economic impact of climate change on the UK and how adaptation can reduce it.
First, the theoretical groundwork for thinking about the macroeconomics of climate change is summarised, along with the key features of adaptation. For instance, the aspects of climate change most relevant to economic performance will be outlined, along with their hypothesised relationships to key economic variables. The different concepts of adaptation are explained, including autonomous versus planned adaptation and adaptation with fixed capital versus adaptation with variable capital.
Second, the project considers the different modelling approaches that have been used to engage with this problem, the estimates resulting from each approach and the strengths and limits of different methods of modeling. This includes estimates from bottom-up, sector-specific models, integrated assessment models and computable general equilibrium models.
Finally, there are proposals for quantifying the value of adaptation based on the use of macroeconomic modeling. Throughout, the key role played by assumptions concerning high impact, low probability events will be emphasized. The result is an accessible source of the most relevant and up-to-date information on the interactions between climate change and the macroeconomy, and what this implies for our thinking on adaptation.
The aim of this project is to provide a comprehensive review of the current modelling techniques that exist to model the macroeconomic impact of climate change with and without adaptation. The focus of attention will be on integrated assessment models, general equilibrium models (e.g. computational and dynamic stochastic) and partial equilibrium models.
The review must analyse how adaptation can be incorporated into climate change modelling. If no prior literature exists on adaptation for specific models then recommendations should be made on how adaptation can be conceptually incorporated into the current economic framework.
Furthermore, an appraisal of the strengths and limitations of each modelling technique must be included. Particular attention should be placed on the sensitivity of each of the models to a) their underlying assumptions and b) low probability, high impact events. On this basis a set of recommendations should conclude for what purpose each model might best be used by Defra for future research projects.
The review will be a plain English document for policy officials. Technical information will be provided as part of an annex. The research will be used to inform and provide recommendations to policymakers on the most appropriate direction of future research projects on the macroeconomics of climate change and the economic value to the UK of adaptation.
Project Documents
• FRP - Final Report : The Macroeconomics of Climate Change Final Report, May 2013 (CA0402)   (1152k)
Time-Scale and Cost
From: 2012

To: 2013

Cost: £39,220
Contractor / Funded Organisations
Vivid Economics Ltd