Macroeconomic implications of large-scale productivity shocks

By Weifeng Larry Liu, Warwick J. McKibbin, Adele C. Morris, Peter J. Wilcoxen, Energy Economics, June 2026

Climate change poses risks to the environment and the economy. This paper examines approaches for incorporating a limited set of physical climate risks into an economic model and estimating their macroeconomic impacts across different climate scenarios. Using a global dynamic general equilibrium model (G-Cubed), the analysis covers the global economy with a particular focus on the United States. These macroeconomic projections associated with climate-related productivity shocks are part of a wider endeavor to understand the climate challenge and the relative merits of potential policy responses.

Using estimates from other studies, we first represent climate change effects as productivity shocks and project their general equilibrium effects in G-Cubed. We consider three paths of productivity shocks: two global Shared Socioeconomic Pathways (SSP) scenarios that reduce total factor productivity (TFP), and one US-only scenario that increases productivity in the agricultural sector and lowers labor productivity in other sectors. We also determine the path of the US equity risk premium that produces the same reductions in US GDP that arise in SSP2–4.5 through 2060. Finally, we explore an alternative approach in which the impact of climate change takes the form of a deterioration of the capital stock, which we represent by a reduction in the rate at which physical capital provides capital services in both production and housing. We use the same calibration process as we do with the equity risk premium: we determine the reduction in capital services per unit of physical capital that produces the same impact on US GDP as SSP2–4.5.

We find that the macroeconomic impacts of our productivity scenarios in the United States are modest through 2060, reducing US GDP by 0.2% to 0.5% relative to a no-climate-change baseline. Effects on US employment, international trade, and capital flows are also small. Our scenario with sector-specific shocks to labor productivity produces more severe impacts than aggregate shocks to TFP. Outcomes differ significantly across countries: near-term GDP impacts are positive for several regions in the Global North, driven by productivity gains and international capital flows. Also, our results for our alternative scenarios show that by 2060, the GDP impacts in SSP2–4.5 are roughly equivalent to: (1) an increase in the equity risk premium of 1.75 percentage points; or (2) a decrease in capital services per unit of capital of about 1.4 percentage points. In addition, we find that the capital degradation scenario leads to larger welfare losses than the productivity reduction scenarios largely because of its impacts on household capital. Households reduce consumption and increase saving to offset the decline.