Interactive Climate Effects on Economic Growth

Traditional economic models of climate change impacts rely on annual mean temperatures, overlooking crucial interactions between temperature and precipitation. Using a 59-year panel of country-level data, we show that incorporating these interactions reveals substantial heterogeneity in economic impacts across countries. Under a high-emission scenario, we project global economic production to decline by 58% by 2100 when accounting for interactive effects, compared to 75% without them. The interactions capture adaptation to local climates, with 80% of the countries experiencing reduced damages when including temperature-precipitation interactions compared to models without them. These countries generally experience temperatures above their optima, and higher precipitation trends are associated with greater damage mitigation. However, in cold regions traditionally expected to benefit from warming, projected wetting trends reduce these benefits and in some cases convert them to damages. These findings demonstrate that incorporating climate interactions moderates extreme projections and is essential for accurate assessment of climate change's economic impacts.