Climate change and institutional change: what is the relative importance for economic performance?
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Climate change and institutional change: what is the relative importance for economic performance? Otto Brøns‑Petersen1 · Søren Havn Gjedsted1 Received: 25 March 2020 / Accepted: 16 October 2020 © Society for Environmental Economics and Policy Studies and Springer Japan KK, part of Springer Nature 2020
Abstract A growing empirical literature attempts to assess the effect of climate and institutional quality (measured by e.g. economic freedom) on economic growth, both being important fundamental growth conditions. So far, these conditions have been studied apart, even if they from a theoretical point of view are non-exclusive and could both be important. This study investigates their interaction and relative importance, using dynamic panel models. Both global warming and declining institutional quality affect growth adversely. A permanent negative shock of one unit to institutional quality (on a 0–10 scale) is associated with a 10.4% lower long run GDP per capita. In our preferred model, the adverse growth effect of global warming is significant and large compared to the literature, implying a 3.4% drop in global GDP from a 1 °C temperature rise. The effect is quadratic. For 79% of the World the adverse effect of a one-point fall in institutional quality dwarfs the effect of a temperature rise of one degree. Our study suggests that policies to reduce global warming should not be at the expense of policies to enhance institutional quality, which are more important for long time growth. Keywords Institutional quality · Temperature · Economic wealth · Economic freedom · Global warming JEL Classification E23 · Q54 · Q56
1 Introduction Which factors determine the wealth of nations? The data and replication codes are available at http://www.cepos.dk/documentation. * Otto Brøns‑Petersen [email protected] 1
Center for Political Studies, Landgreven 3, 3 sal, 1301 København K, Denmark
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Environmental Economics and Policy Studies
In modern economic and political theory, three root causes or “environmental” factors stand out: Institutions, geography, and culture. Fundamental or environmental factors would not be fundamental if easily changeable and subject to day-to-day political decision making. However, some are changeable none-the-less and subject to deliberate policies. Two of them have been on the political agendas for some time, one institutional and one geographical. The first is the question of economic institutions. On a global scale, institutional change has been substantial in many cases in the post-war era, ranging from regime changes in some countries to piecemeal economic reforms in most. Substantial institutional international variation subsists, however. The other is the question of climate change. Although no country can change its climate on its own several international attempts have been made to accomplish a concerted action against global climate change. Most countries are committed to undertake policies to reduce greenhouse gas (GHG) emissions widely believed to be an im
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