Publication: Economic Structural Change as an Option for Mitigating the Impacts of Climate Change
Loading...
Published
2016-04
ISSN
Date
2016-05-04
Author(s)
Toman, Michael
Editor(s)
Abstract
Improving the resilience of the economy in the face of uncertain climate change damages involves irreversible investments to scale up new technologies that are less vulnerable to the effects of climate change. The benefit of having such options includes the avoided welfare cost of diverting consumption to scaling up the new technology after production possibilities have been diminished by climate change impacts. This needs to be balanced against the upfront cost of scaling up a technology that is potentially less productive than incumbent technologies. The paper uses a real options approach to investigate this trade-off, based on numerical simulation of a multi-period model of economic growth and climate change impacts that includes a one-time cost associated with scaling up the alternative technology. The value of the option provided by investment in the more resilient technology depends on the ex-ante volatility of climate change damages, as well as how rapidly climate change degrades the productivity of the economy's established technology. In addition, the size of scale-up cost that leaves the economy indifferent between investing and not investing in the new technology can be used to define the value of early investment in the less climate change–vulnerable technology as a sort of call option.
Link to Data Set
Citation
“Toman, Michael; Golub, Alexander. 2016. Economic Structural Change as an Option for Mitigating the Impacts of Climate Change. Policy Research Working Paper;No. 7637. © World Bank. http://hdl.handle.net/10986/24211 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Economic Value of Weather Forecasts: A Quantitative Systematic Literature Review(Washington, DC: World Bank, 2025-09-10)This study systematically reviews the literature that quantifies the economic benefits of weather observations and forecasts in four weather-dependent economic sectors: agriculture, energy, transport, and disaster-risk management. The review covers 175 peer-reviewed journal articles and 15 policy reports. Findings show that the literature is concentrated in high-income countries and most studies use theoretical models, followed by observational and then experimental research designs. Forecast horizons studied, meteorological variables and services, and monetization techniques vary markedly by sector. Estimated benefits even within specific subsectors span several orders of magnitude and broad uncertainty ranges. An econometric meta-analysis suggests that theoretical studies and studies in richer countries tend to report significantly larger values. Barriers that hinder value realization are identified on both the provider and user sides, with inadequate relevance, weak dissemination, and limited ability to act recurring across sectors. Policy reports rely heavily on back-of-the-envelope or recursive benefit-transfer estimates, rather than on the methods and results of the peer-reviewed literature, revealing a science-to-policy gap. These findings suggest substantial socioeconomic potential of hydrometeorological services around the world, but also knowledge gaps that require more valuation studies focusing on low- and middle-income countries, addressing provider- and user-side barriers and employing rigorous empirical valuation methods to complement and validate theoretical models.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Labor Demand in the Age of Generative AI: Early Evidence from the U.S. Job Posting Data(Washington, DC: World Bank, 2025-11-18)This paper examines the causal impact of generative artificial intelligence on U.S. labor demand using online job posting data. Exploiting ChatGPT’s release in November 2022 as an exogenous shock, the paper applies difference-in-differences and event study designs to estimate the job displacement effects of generative artificial intelligence. The identification strategy compares labor demand for occupations with high versus low artificial intelligence substitution vulnerability following ChatGPT’s launch, conditioning on similar generative artificial intelligence exposure levels to isolate substitution effects from complementary uses. The analysis uses 285 million job postings collected by Lightcast from the first quarter of 2018 to the second quarter of 2025Q2. The findings show that the number of postings for occupations with above-median artificial intelligence substitution scores fell by an average of 12 percent relative to those with below-median scores. The effect increased from 6 percent in the first year after the launch to 18 percent by the third year. Losses were particularly acute for entry-level positions that require neither advanced degrees (18 percent) nor extensive experience (20 percent), as well as those in administrative support (40 percent) and professional services (30 percent). Although generative artificial intelligence generates new occupations and enhances productivity, which may increase labor demand, early evidence suggests that some occupations may be less likely to be complemented by generative artificial intelligence than others.Publication The Lasting Effects of Working while in School(Washington, DC: World Bank, 2025-08-18)This paper provides the first experimental evidence on the long-term effects of work-study programs, leveraging a randomized lottery design from a national program in Uruguay. Participation leads to a persistent 11 percent increase in formal labor earnings, observable seven years after the program. Effects are stronger for youth who participate during pivotal educational transitions and are larger for vulnerable youth and men, while remaining positive for women and non-vulnerable youth. The program is highly cost-effective, with average impacts exceeding those of job training programs and comparable to early childhood investments.Publication It’s Not (Just) the Tariffs: Rethinking Non-Tariff Measures in a Fragmented Global Economy(Washington, DC: World Bank, 2025-10-22)As tariffs have declined, non-tariff measures (NTMs) have become central to trade policy, especially in high-income countries and regulated sectors like food and green technologies. Although NTMs may serve legitimate goals, they could also sort countries and firms into or out of markets based on compliance capacity and differences in product mix. Documenting recent advances in the estimation of ad valorem equivalents (AVEs), this paper uncovers new patterns of use and exposure of NTMs. High-income countries rely more heavily on NTMs relative to tariffs, while low- and middle-income countries face steeper AVEs on their exports. Firm-level evidence shows that NTMs disproportionately affect smaller firms, leading to market exit and concentration. Poorly designed NTMs can harm productivity and welfare, while coordinated, capacity-aware use can deliver inclusive outcomes. Policy design, transparency, and diagnostics must evolve to reflect the growing role—and risks—of NTMs in a fragmented global trade landscape.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication The Need for Multiple Types of Information to Inform Climate Change Assessment(World Bank Group, Washington, DC, 2014-11)Information on ecosystem characteristics as well as economic statistics is needed to more fully inform decision makers on the impacts of climate change on human well-being. Climate change risks involve potentially large and irreversible as well as highly uncertain impacts that need to be evaluated with information that complements cost-benefit analysis. Information on the irreversibility of impacts also is relevant for evaluating implications for intergenerational equity. In addition, climate change is subject to a large degree of Knightian uncertainty, making it useful to understand how individuals perceive and evaluate climate change risks.Publication Climate Change, Industrial Transformation, and "Development Traps"(World Bank, Washington, DC, 2014-06)This paper examines the possibility of environmental "development traps," or "brown poverty traps," caused by interactions between the impacts of climate change and increasing returns in the development of "clean-technology" sectors. A simple specification is used in which the economy can produce a single homogeneous consumption good with two different technologies. In the "old" sector, technology has global diminishing returns to scale and depends on the use of fossil energy that gives rise to long-lived, damaging climate change. In the "new" sector, the technology has convex-concave production and is not dependent on the polluting energy input. If the new sector does not grow fast enough to move through the phase of increasing returns, then the economy may linger at a low level of income indefinitely or it may achieve greater progress but then get driven back down to a lower level of income by environmental degradation. Stimulating growth in the new sector thus may be a key element for avoiding an environmental poverty trap and achieving higher, sustained income levels.Publication Responding to Threats of Climate Change Mega-Catastrophes(2009-11-01)There is a low but uncertain probability that climate change could trigger "mega-catastrophes," severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, the authors present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes - drastic abatement of greenhouse gas emissions, development and implementation of geoengineering, and large-scale ex ante adaptation - against the criteria of efficacy, cost, robustness, and flexibility. They discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.Publication Climate Change and Economic Policies in APEC Economies : Synthesis Report(World Bank, 2010-11-17)Drawing on several studies on APEC economies, this report discusses economic policy choices for mitigating and adapting to climate change effects. It highlights that APEC economies will have a central role in both sides of climate change. These economies include some of the largest emitters and also those among the most vulnerable to the impact of climate change. The report suggests that action on climate change will require a wide range of economic policy interventions, including most importantly fiscal policies. These will include setting carbon prices that cost emissions properly, liberalizing and strengthening markets so that prices and costs can be passed- through, offsetting other biases towards capital and emissions intensive economic growth and supporting technology based policies. On the adaptation side, the report emphasizes the importance of fiscal policy and investment choice tools that incorporate the uncertainty surrounding the nature and location of climate change effects. The report discusses how emissions reduction through appropriate climate friendly technologies (CFTs) can be an important complement to more politically sensitive mitigation measures (like carbon pricing). At the same time, CFTs can provide co-benefits like rural electrification. The current status of CFTs in APEC economies - their production, use and trade - are discussed along with technology neutral and technology specific policies and trade and investment policies that can support these technologies. Financing these policy interventions - both technology based and otherwise - will require various measures, including efficient market mechanisms that create incentives to reduce mitigation costs, facilitate financing of mitigation efforts through crediting mechanism and emissions trading, and setting up the necessary institutions. This report also considers policy responses to extreme climate events and their impact on the poor at the community level. Finally, since climate change is inherently of a cross-border, regional and even global nature, there is substantial scope for regional cooperation by APEC economies to address climate change issues. This report concludes with some initial thoughts on some key areas for this cooperation.Publication Climate Change and Fiscal Policy : A Report for APEC(World Bank, 2011-01-31)Asia-Pacific Economic Cooperation (APEC) economies display large variation in terms of income per capita. The richest APEC economies have an income per capita about twenty times higher than the poorest ones. So far most work on fiscal policy and climate change has been written with developed economies in mind. This report on the use of fiscal policies for mitigating and adapting to climate change effects corrects that bias with a particular focus on the developing economies of APEC. It also plays close attention to lessons that could be learnt from the advanced economies of APEC and elsewhere. On mitigation, the report notes that achieving the ambitious targets adopted by APEC economies will depend crucially the choice of fiscal policy instruments. These choices will depend, in turn, on the characteristics of developing economies, particularly of their energy sectors. Specifically, mitigation in developing countries requires a broad-based response with four key components. First, carbon pricing will be critical, but will not be sufficient and in some economies and some sectors may have little or no impact due to pre-existing distortions. Second, energy sector reforms that liberalize markets and establish effective regulators so that policies can support appropriate carbon prices and cost pass-through in the energy sector will be key. Third, broader economic reforms may also be important to off-set current bias towards capital and energy intensive economic growth. Fourth, technology-based mitigation policies will also be needed, but, given the mixed track record in this area, must be chosen with care. Given the many uncertainties involved, and the multiple reforms needed, a verifiable quantity anchor for mitigation policy is recommended for developing economies, such as the energy-intensity target recently adopted by China. On the adaptation side, fiscal analysis has so far largely focused on cost projections, but for policy makers adaptation instruments and decision-making tools are as or more important. Adaptation instruments include the provision of public and club goods (such as infrastructure), public sector pricing reform (in particular of water) and financial instruments (microcredit and insurance) which can be cost-effective alternatives to subsidies. Key to the right choice of instruments (which will vary from location to location) will be the correct use of appropriate decision-making tools. In particular, the social costs and benefits of alternative strategies need to be analyzed under conditions of uncertainty, in many ways the hallmark of climate change. Popular tools such as multi-criteria analysis, vulnerability indexes, and cost- effectiveness analysis are inadequate to the task. A combination of Monte Carlo and 'real options' analysis within a cost-benefit framework is recommended for adaptation projects. Examples from a range of economies are provided to demonstrate the utility of such an approach.
Users also downloaded
Showing related downloaded files
Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.Publication Lebanon Economic Monitor, Fall 2022(Washington, DC, 2022-11)The economy continues to contract, albeit at a somewhat slower pace. Public finances improved in 2021, but only because spending collapsed faster than revenue generation. Testament to the continued atrophy of Lebanon’s economy, the Lebanese Pound continues to depreciate sharply. The sharp deterioration in the currency continues to drive surging inflation, in triple digits since July 2020, impacting the poor and vulnerable the most. An unprecedented institutional vacuum will likely further delay any agreement on crisis resolution and much needed reforms; this includes prior actions as part of the April 2022 International Monetary Fund (IMF) staff-level agreement (SLA). Divergent views among key stakeholders on how to distribute the financial losses remains the main bottleneck for reaching an agreement on a comprehensive reform agenda. Lebanon needs to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Argentina Country Climate and Development Report(World Bank, Washington, DC, 2022-11)The Argentina Country Climate and Development Report (CCDR) explores opportunities and identifies trade-offs for aligning Argentina’s growth and poverty reduction policies with its commitments on, and its ability to withstand, climate change. It assesses how the country can: reduce its vulnerability to climate shocks through targeted public and private investments and adequation of social protection. The report also shows how Argentina can seize the benefits of a global decarbonization path to sustain a more robust economic growth through further development of Argentina’s potential for renewable energy, energy efficiency actions, the lithium value chain, as well as climate-smart agriculture (and land use) options. Given Argentina’s context, this CCDR focuses on win-win policies and investments, which have large co-benefits or can contribute to raising the country’s growth while helping to adapt the economy, also considering how human capital actions can accompany a just transition.