Climate Change Economics and Inflation Dynamics

Global Warming: Scientific Foundations and Macroeconomic Consequences

Atmospheric concentrations of carbon dioxide ($\text{CO}_2$) have risen from pre-industrial baseline levels of approximately $280\,\text{ppm}$ to over $410\,\text{ppm}$, driving an enhanced greenhouse effect. Over the past century, global average surface temperatures have increased by approximately $+1^\circ\text{C}$. While the causal relationship between greenhouse gas accumulations and warming is empirically established, significant academic research focuses on quantifying "climate sensitivity"—defined as the expected equilibrium global surface temperature increase following a doubling of atmospheric $\text{CO}_2$ concentrations.

Paleoclimate reconstructions over the common era (years 1–2000) compared against direct instrumental observations (1850–2020) demonstrate that contemporary decadal warming is unprecedented in more than 2,000 years. Furthermore, the modern era represents the warmest multi-century climatic period observed in more than 100,000 years.

Attribution modeling demonstrates that observed temperature trajectories cannot be explained by natural radiative forcing alone. Climate model simulations restricted exclusively to solar and volcanic variations project near-zero net anomaly changes relative to pre-industrial baselines. The observed exponential warming curve matches climate models only when anthropogenic factors—principally greenhouse gas emissions from industrial activity—are combined with natural forcings.

The structural cause of anthropogenic warming lies in the sustained global economic expansion that began in the 19th century, underpinned by cheap, energy-dense fossil fuels (coal, crude oil, and natural gas). This macroeconomic link is formalized via the Kaya Identity:

$\text{CO}_2 = \text{GDP} \times \frac{E}{\text{GDP}} \times \frac{\text{CO}_2}{E}$

Where:

• $\text{GDP}$ represents aggregate economic output.

• $\frac{E}{\text{GDP}}$ represents the energy intensity of gross domestic product (energy consumed per unit of economic output).

• $\frac{\text{CO}_2}{E}$ represents the carbon intensity of energy (emissions released per unit of energy consumed).

Empirical data on global power generation (measured in terawatt-hours, $\text{TWh}$) demonstrate that global electricity demand expanded from under $10,000\,\text{TWh}$ in 1985 to over $30,000\,\text{TWh}$ by 2024. Despite the rapid growth of wind and solar capacity, thermal generation remains predominant: coal remains the largest absolute generating source (surpassing $10,000\,\text{TWh}$), followed by natural gas, hydropower, nuclear, wind, solar, oil, and bioenergy.

Emerging technological secular trends exacerbate structural electricity consumption. Projections by the International Energy Agency (IEA) regarding the artificial intelligence and data infrastructure expansion show that data center power generation will double from approximately $300\,\text{TWh}$ in 2020 to more than $1,000\,\text{TWh}$ by 2035. Fossil fuels are projected to supply more than $50\%$ of data center electric power until 2030, driving data center annual emissions to a peak exceeding $300\text{ million tonnes of }\text{CO}_2$ around 2030 before low-carbon generation stabilizes net sectoral output.

The Economic Impacts of Climate Change and the Carbon Budget

The economic consequences of unmitigated climatic shifts operate through two distinct analytical channels:

1. Indirect Macroeconomic Effects: Rising sea levels, glacier and polar ice cap melting, and higher frequencies of extreme meteorological events (cyclones, hurricanes, prolonged droughts, wildfires, and catastrophic floods). These generate systemic capital depreciation, private and public infrastructure replacement costs, higher insurance risk premia, and disruptions across global supply networks.

2. Direct Labor and Factor Productivity Effects: Severe thermal stress degrades human labor capacity and cognitive task efficiency when ambient working temperatures deviate from biological optimums.

Empirical research synthesizing occupational ergonomics (e.g., Seppanen et al., 2006) demonstrates that human task performance peaks precisely at $22^\circ\text{C}$ (normalized to an index of 1.0). As ambient workplace temperatures rise toward $30^\circ\text{C}$ and $35^\circ\text{C}$, relative task performance drops rapidly to between $0.80$ and $0.88$ across unweighted, sample-size-weighted, and composite-weighted econometric specifications.

This labor productivity sensitivity creates structural geographic and economic divergence between Northern and Southern economies. Empirical estimations measuring the effect of a $1^\circ\text{C}$ temperature increase on the log of income per capita across global climatic zones demonstrate an uneven shock distribution:

• Cool and Very Cool Zones (VC & C): High-income, temperate economies (such as Norway, Sweden, Canada, the United Kingdom, Germany, France, the United States, and China) experience neutral to slightly positive output shocks (ranging from $0.00$ to $+0.04$ in log income per capita adjustments) due to extended agricultural growing seasons and reduced winter heating outlays.

• Medium, Hot, and Very Hot Zones (M, H, & VH): Tropical and equatorial developing economies (such as Egypt, Brazil, Kenya, Pakistan, the Republic of the Congo, Nigeria, Thailand, India, Kuwait, and Saudi Arabia) face sharp negative output shocks, with log income per capita contracting between $-0.03$ and $-0.06$ per $1^\circ\text{C}$ increase.

The global target established under the 2015 Paris Agreement aims to limit cumulative global surface warming to well below $+2^\circ\text{C}$ relative to pre-industrial levels by 2100. Achieving this target requires adhering to a finite remaining carbon budget:

• The remaining global carbon budget is estimated at approximately $800\,\text{Gt of }\text{CO}_2$.

• Current global anthropogenic emissions average approximately $40\,\text{Gt of }\text{CO}_2\text{ per year}$.

• At current run-rates, the global carbon budget will be entirely exhausted within 20 years.

National shares of historic and contemporary global emissions have shifted structurally. According to the International Energy Agency (IEA), China accounted for slightly over $5\%$ of annual global $\text{CO}_2$ emissions in 1971; by 2017, China generated approximately $28\%$ of the global total. Over that same timeframe, the United States' share dropped from $30\%$ to approximately $15\%$, and OECD Europe fell from $25\%$ to approximately $11\%$, while India's share increased from $1\%$ to over $7\%$.

According to the UN Emissions Gap Report (2024), current total and per capita emissions (excluding land use, land-use change, and forestry) vary widely across jurisdictions:

• Russian Federation: $19.0\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $2,660\,\text{Mt }\text{CO}_2\text{e}$ ($+2.0\%$ annual change from 2022 to 2023).

• United States: $18.0\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $5,970\,\text{Mt }\text{CO}_2\text{e}$ ($-1.4\%$ annual change).

• China: $11.0\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $16,000\,\text{Mt }\text{CO}_2\text{e}$ ($+5.2\%$ annual change).

• G20 (excl. African Union): $8.3\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $40,900\,\text{Mt }\text{CO}_2\text{e}$ ($+1.8\%$ annual change).

• European Union (27 member states): $7.3\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $3,230\,\text{Mt }\text{CO}_2\text{e}$ ($-7.5\%$ annual change).

• Brazil: $6.0\,\text{t }\text{CO}_2\text{e per capita}$; total emissions of $1,300\,\text{Mt }\text{CO}_2\text{e}$ ($+0.1\%$ annual change).

• India: $$2.9\