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 per cent lower long run GDP. In our preferred model the adverse growth effect of global warming is significant and large compared to the literature, implying a 3.4 per cent drop in global GDP from a one-degree Celsius temperature rise. The effect is quadratic; for 79 per cent of the World the adverse effect of a temperature rise of one degree would be dwarfed by the effect on GDP of a one-point fall in institutional quality. 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.
Publiceret i Environmental Economics and Policy Studies, 2020. https://doi.org/10.1007/s10018-020-00290-7
Der desuden udarbejdet et kort, ikke-teknisk notat på dansk. Det gennemgår hovedresultaterne i arbejdspapiret ”Climate change and institutional change - what is the relative importance for economic performance”. Notatet er ”Økonomisk frihed er vigtigere end temperatur for velstand” af analysechef Otto Brøns-Petersen