En-ROADS June 2023: Economic Damage Function

June 1, 2023 by Climate Interactive

The June 2023 En-ROADS and C-ROADS Baseline Scenarios now incorporate the estimated effect of temperature change on global economic growth. This effect is known as the economic damage function. Read more or check out the video below to explore the impact it has.

Slower economic growth in En-ROADS

The best way to see the impact of climate change on the global economy in En-ROADS is the “Gross World Product” graph (Graphs > Population & GDP > Gross World Product). While the global economy still grows strongly in the 2023 Baseline Scenario, it expands at a slower pace than if there was no impact from temperature change (the dashed line). The result is that the global economy will be 19% smaller by 2100 than what it would be without the damage function factored in ($536 trillion per year compared to $665 trillion per year).

In this scenario, extreme weather events, sea level rise, desertification, migration, and other impacts damage infrastructure and increase costs. This causes nations of the world to produce fewer goods and services, and results in lower economic growth than there would have been without the climate impacts.

Impact on temperature reduction in the Baseline Scenario

The Baseline Scenario temperature in 2100 is 0.26 °C lower (from 3.6 °C in 2100 down to 3.3 °C) due to the damage function being incorporated. Slower economic growth dampens energy demand, which reduces fossil fuel use, and lowers CO₂ emissions.

Thus, the most important takeaway for En-ROADS users that have noticed changes to the Baseline Scenario is that:

Most of the decrease in emissions and temperature in the 2023 Baseline Scenario relative to the 2022 Baseline Scenario is due to the addition of economic damages as a result of temperature.

The damage function can be switched off by navigating to Simulation > Assumptions > Economy: Economic impact of climate change and toggling the switch “Climate change slows economic growth,” which changes the Current Scenario to exclude the feedback of economic impact from climate change.

Learn more about the changes to the Baseline Scenario in the June 2023 release here.

Policy compensation effect

When climate action successfully lowers warming, it also leads to less climate damage, which results in slightly higher economic growth. Higher economic growth drives more energy demand, which leads to more fossil fuel use, and a subsequent increase in CO₂ emissions and warming. The lowered effectiveness of climate outcomes from climate action forms a compensating or balancing feedback loop.

As a result, En-ROADS users may notice that compared to older versions:

Climate action in the simulator now has less of an effect on emissions, temperature, and other climate outcomes such as sea level rise.

For example, moving the Carbon Price slider to $250/ton CO₂ results in a change in “Greenhouse Gas Net Emissions” in 2050 of only 26 Gigatons CO₂eq/year. The same carbon price, with the damage function switched off, results in a change in “Greenhouse Gas Net Emissions” in 2050 of 30 Gigatons CO₂eq/year.

Context and background

Climate change is causing significant impacts worldwide and those impacts will increase with rising temperatures, which will cause substantial economic losses among other harms to people’s health and communities. En-ROADS and C-ROADS already show the power of climate action to reduce climate impacts such as changes in sea level rise, crop yield, and deaths from extreme heat (displayed under Graphs > Impacts). In the 2023 Baseline Scenario the impact on economic growth from climate change — known as the damage function — is now included so that this important feedback is captured in scenarios that people create.

The basis of the Baseline Scenario damage function is a study from Burke et al. 2018¹. If users would like to choose a higher or lower pathway for the damage function they can select from the functions of other peer-reviewed studies or create their own. En-ROADS and C-ROADS use the Burke et al. (2018) study because it falls in the mid-range of studies that were reviewed on the amount of economic damage there could be under different global temperature trajectories. More information about the Burke 2018 damage function and why it is the default option can be found in the FAQ: “Why does En-ROADS use the damage function from Burke et al. (2018) as the default damage function?”

Understanding the dynamics of the damage function

Economic growth, measured in global GDP, drives energy demand, and therefore greenhouse gas emissions. In a scenario with low economic growth there will be decreased energy demand and, as a result, lower CO₂ emissions from energy.

The figure below shows how the damage function forms a balancing feedback loop. Rising global temperature causes climate impacts to lower economic growth. Lower economic growth reduces global energy consumption, leading to fewer greenhouse gas emissions and a lower temperature increase.

This feedback loop also creates the policy compensation effect described earlier, when reduced emissions lead to less temperature increase and, consequently, slightly higher economic growth.

The dampened economic growth from the damage function reflects the effects of severe storms, droughts, diminished crop yields, and all the other climate impacts that lower economic productivity. These disasters affect vulnerable and marginalized populations first and most severely, exacerbating inequity and suffering.

Advanced features

Key graphs

In addition to “Gross World Product” and “GDP per Capita”, En-ROADS features two other graphs illustrating the impact of climate change on economic growth.

The “Global GDP Loss” graph under Graphs > Impacts shows the GDP without climate change impacts, comparing it to the United States GDP in 2019 (light gray dotted line) and global GDP in 2019 (dark gray dotted line). Mitigating climate change reduces GDP loss.
The “Reduction in GDP from Climate Impacts” graph under Graphs > Population & GDP displays GDP loss as a percentage.

To see all graphs associated with the damage function, read the FAQ: “What graphs do I look at to see the impact of temperature on economic growth (the climate “damage function”)?”

How to change the damage function: turn it off, choose a different option, or create a custom one

Controls to modify the damage function are located under Simulation > Assumptions > Economy: Economic impact of climate change. Note that changes made to the Assumptions only affect the Current Scenario, not the Baseline Scenario. The Baseline Scenario will still include the default Burke 2018 damage function, even if the damage function is turned off or a different one is selected for the Current Scenario.

En-ROADS offers three additional preset damage function options from other studies: Burke 2015, Dietz & Stern, and Howard & Sterner. Alternatively, selecting the custom option opens additional controls to formulate a different damage function.

The “Reduction in GDP vs. Temperature” graph under Graphs > Population & GDP compares climate damage estimates of the damage function alternatives. It is different from the other graphs because, instead of years on the x-axis, it shows temperature change, up to 5 °C. The y-axis shows the percent reduction in GDP due to climate impacts. Each line represents a preset alternative, and the blue line shows the Current Scenario. For example, if the damage function assumption is changed to Dietz & Stern (2015), the Current Scenario changes to follow the orange line that shows the Dietz and Stern (2015) function.

Additional technical details regarding how the economic impact of climate change and social cost of carbon are modeled in En-ROADS can be found in the “Damage to GDP” section of the En-ROADS Technical Reference.

Burke, M., Davis, W.M. & Diffenbaugh, N.S. (2018). Large potential reduction in economic damages under UN mitigation targets. Nature 557, 549–553. ↩