Climate change and economic growth: Evidence for European countries

Abstract

Climate change may affect economies and the welfare of people around the world. To design appropriate policy responses, the economic effects of climate change should be known. One strand in the literature empirically estimates the growth effects of climatic variations. However, those studies often neglect economic variables that have proven to be robust in explaining economic growth. Further, often they fail to check for the robustness of their results. The main aim of this study is to detect whether there exists a statistically significant robust relation between climate change and economic growth by estimating different model specifications. To do so panel estimation techniques for 24 European economies for the period from 2002 to 2019 are applied whereby panel fixed effects estimations and dynamic Generalized Methods of Moments estimations are resorted to. No statistically significant robust relationship between the temperature change and economic growth is found just as for precipitation that does not exert a significant effect on growth. As regards the institutional and macroeconomic control variables the rule of law, the fiscal variable, and the output gap are statistically significant and robust. It is argued that far-reaching policy measures, such as the net zero goal of the European Union, should be given only based on robust results. Otherwise, economic policy may turn out to be inadequate and can lead to welfare losses. Hence, the conclusion is that the net zero goal of the European Green Deal is to be seen skeptical.