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What if people value nature? Climate change and welfare costs

Marcelo Arbex () and Michael Batu

Resource and Energy Economics, 2020, vol. 61, issue C

Abstract: We introduce temperature shocks and preferences for environmental quality in a real business cycle model with natural resources. Temperature anomalies are transmitted to the business cycles via their negative effects on output and agents’ utility. Our findings suggest that permanent and temporary weather shocks propagation and their welfare implications depend crucially on whether agents value environmental quality. A permanent increase in temperature reduces output with damages reaching up to 1.61% of GDP. Agents who value environmental quality experience a higher temporary welfare gain when facing a negative weather shock, but welfare drops faster as the economy returns to equilibrium. Temperature anomalies amplify the (negative) effect of climate change on natural resources use and welfare.

Keywords: Business cycles; Temperature shocks; Climate change; Environmental quality (search for similar items in EconPapers)
JEL-codes: E32 Q54 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.reseneeco.2020.101176

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