Economic Growth🔗

Assume higher or lower growth in goods produced and services provided. Economic Growth is measured in Gross Domestic Product (GDP) GDP: Gross Domestic Product. The total value (money) of goods produced and services provided in a country during one year. per person and is a key driver in energy consumption. Alternatives exist to meeting people’s needs through economic frameworks not based on constant GDP growth.

Examples🔗

• Global efforts to reduce overconsumption and embrace voluntary simplicity.
• High economic growth driving increased consumption of resources and higher emissions.

Big Messages🔗

• Slower economic growth would be a high-leverage approach for avoiding future temperature increases, however, there are lots of questions about how this might occur and be done in a way that is equitable.
• Climate change impacts have the power to significantly reduce economic growth.

Key Dynamics🔗

• Impact. Watch all the sources of energy change as you change economic growth. Population gets multiplied with GDP per capita to equal total global GDP, or Gross World Product. Increases in GDP per capita accelerate the exponential growth of total global GDP, arguably the most important driver of carbon dioxide emissions currently. Use the Kaya graphs to understand how economic growth affects emissions in your scenario.

• If the energy system is decarbonized, higher economic growth won’t have as much impact on temperature.

• Climate change slows economic growth, which reduces energy demand and the greenhouse gas emissions, producing a balancing loop that then limits climate change. You can turn off this behavior by switching off the Assumption under “Economic impact of climate change.”

Potential Co-Benefits of Lower Growth🔗

• Focus may be shifted to alternative measures of prosperity that enhance people’s wellbeing, such as gross national happiness.
• Greater focus on resource conservation and less on material consumption can lead to less waste.

Equity Considerations🔗

• Economic growth is tied to pulling people out of poverty worldwide. Although, in recent decades, many gains in economic growth have gone to the world’s wealthiest. Regardless, policies must be tailored to specific local and regional circumstances.
• When GDP growth slows or contracts, governments can incur higher budget deficits, often implementing austerity measures—cutting spending and raising taxes—to offset the difference. These reforms can severely impact the poor and working class, causing job losses and all the inequities that come with loss of livelihood.¹
• Actions that limit climate change reduce the economic damage from climate impacts, which increases GDP per person, consumption, and energy demand.

Slider Settings🔗

Economic Growth

The “Long-term economic growth” slider is the main slider that is used for controlling economic growth. However, more precise assumptions about economic growth can be set by also adjusting the “Near-term economic growth” slider. This slider sets the initial global average growth in GDP per person. The slider “Transition time” is available to change the amount of time it takes for the “Near-term economic growth” level to reach the “Long-term economic growth” level.

Reduction in GDP from Climate Impacts

Climate change is expected to have multiple adverse effects on the economy, such as decreased investment in goods and services due to the cost of responding to changes in extreme weather events, sea level rise, desertification, crop yield decreases, flooding, and resulting migration. To account for this, En-ROADS includes a feedback in the Baseline Scenario where increased temperature lowers the estimated amount of economic growth. This is known as the “damage function.” The switch “Climate change slows economic growth” (under Simulation > Assumptions > Economic impact of climate change) enables the user to explore scenarios with and without damage to the economy due to climate change impacts. When the switch is activated, the user can specify which damage function to use in the “Economic damage formulation” slider.

Several economists formulated this impact as a percentage reduction to global GDP, and they estimated it as a function of temperature change. Four main functions from the research literature are included in En-ROADS: Burke et al. (2018), Burke et al. (2015), Dietz & Stern (2015), and Howard & Sterner (2017). Users can also create a custom formulation to test their own estimated impact on GDP from climate change. View the resulting estimates for economic damage in the “Reduction in GDP vs Temperature” graph.

To learn more, visit the Economic Damage from Climate Change section of the En-ROADS Dynamics page.

The "Social discount rate" (SDR) slider under Simulation > Assumptions > Economic impact of climate change is used to calculate the present value of the benefits of actions to reduce global warming because these occur gradually, over the next few hundred years, due to the long lifetime of greenhouse gases in the atmosphere. It represents the concern people alive today have for the welfare of future generations. The higher the social discount rate, the less the welfare of future generations counts.

Model Structure🔗

En-ROADS uses historical economic growth data from the World Bank and then projects that GDP per capita growth for all regions so that it eventually converges on a long-term economic growth rate of 1.5%/year. Economic growth in En-ROADS takes into account the impact on GDP of climate change impacts so actual long-term growth in the Baseline Scenario is less than 1.5%/year. The differences between a scenario that factors in the economic impact from temperature change, and one that doesn’t, can be explored on the “GDP per capita” and “Gross World Product” graphs.

FAQs and Other Resources🔗

• Are the financial or economic costs or benefits of actions modeled in En-ROADS?

• How is the economic impact of climate change (the climate “damage function”) modeled in En-ROADS?

• Why does En-ROADS include the damage function from Burke et al. (2018) in the Baseline Scenario?

• En-ROADS Release June 2023: Economic Damage Function

Please visit support.climateinteractive.org for additional inquiries and support.

Footnotes

[1]: Ruckert, A., & Labonté, R. (2017). Health inequities in the age of austerity: The need for social protection policies. Social Science & Medicine, 187, 306–311.