Working Paper

The GDP Temperature Relationship: Implications for Climate Change Damages

Nov 19, 2018 | Richard G. Newell, Brian C. Prest, Steven E. Sexton

Summary

In the absence of clear theoretical guidance on specific estimable forms for the aggregate GDP-temperature relationship, we consider the implications of model uncertainty for market damages of climate change.

Abstract

A growing literature characterizes climate change damages by relating temperature shocks to GDP. But theory does not clearly prescribe estimable forms of this relationship, yielding discretion to researchers and generating potentially considerable model uncertainty. We therefore employ model cross validation to assess the out-of-sample predictive accuracy of 400 variants of prominent models, identify the set of superior models, and characterize both model and sampling uncertainty. Estimates of GDP impacts vary substantially across models, especially those assuming temperature effects on GDP growth, rather than levels. The best-performing models have non-linear temperature effects on GDP levels, and imply global GDP losses of 1-2% by 2100.