The Potential Impacts of Climate Change on Capital in the 21st Century

Abstract

An endogenous growth model with a simple climate system is used to examine the potential impacts of climate change on the capital-to-net income ratio and the net of depreciation share of income to capital, a measure of wealth concentration and income distribution between capital and labour respectively, over the next two centuries. If climate change only directly affects production, as usually assumed, the capital-to-net income ratio will increase as compared to what it would be in the absence of climate change. The capital-to-income ratio will increase even further if climate change affects labour productivity. In both cases, the increase in the ratio after 2100 is due to the stock of capital being depleted at a lower rate than net income is falling. However, the capital-to-net income ratio will be lower and eventually fall if damage from climate change increases the depreciation rate of capital; this decline is marginally reduced if climate change impacts both capital and labour productivity. In the case where climate change impacts the depreciation of capital, the ratio after 2100 is falling because the stock of capital is destroyed faster than net-income is falling. Furthermore, climate change reduces the net share of income accruing to capital in all scenarios with dramatic changes in the case of climate change affecting the depreciation of capital. Emissions abatement almost completely mitigates these impacts on the capital-to-net income ratio and the net share of income to capital.