Decomposing Direct and Spillover Costs of Global Climate Change on Regional Economies

We present a dynamic multi-region, multi-good dynamic CGE model, which reacts sensitive to changes in regional climate. In the assessment of economic effects of global warming we distinguish between direct effects (impacts in the considered region) and spillover effects (impacts from foreign regions which spillover into the domestic region). This paper shows how these spillover effects work and quantities the contributions of such spillover effects to the total costs of climate change for a region. Climate scenarios are exogenous given by output of a General Circulation Model. The decision makers will minimize the costs of a given scenario and adapt trade relationships. We observe for the end of century very heterogeneous costs for different regions between 23 and 50 % of regional GDP, compared with a scenario without climate change. The application of the Harrison, Horridge, and Pearson (2000) decomposition procedure shows a significant contribution of spillover effects for the total costs of climate change of a region. This result underline the fact that climate change is a real global problem and that international trade makes it even more global.

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