Long-run macroeconomic impact of climate change on total factor productivity - Evidence from emerging economies

Emerging economies (EMEs) often ignore effective mitigation strategies for persistent climate changes to prioritise growth acceleration. This paper shows that they cannot sustain their economic growth due to the adverse impact of temperature rise on total factor productivity (TFP). Using a standard growth model, it demonstrates how temperature rise and variation for growing carbon emissions reduce capital productivity along with the damage to ecosystem services and labour productivity, adversely impacting total factor productivity (TFP) of an individual economy. A cross-sectional augmented auto-regressive distributed lag model (CS-ARDL), which addresses the issues of endogeneity, heterogeneity and cross-sectional dependence with stochastic trends, has been applied to 21 EMEs over the period from 1990 to 2018 and reveals a strong negative impact of temperature rise on total factor productivity. Although EMEs have heterogeneous impacts across the countries depending upon their climatic zones and income levels, one degree increase in temperature, on average, has decreased the TFP by approximately 3.22 per cent. It is much higher in the extreme climatic zones and less developed economies.