The adaptive investment effect: Evidence from Chinese provinces

Abstract

This paper investigates the so-called "adaptive investment effect", a redirection of investment in productive capital towards adaptive capital with a view to mitigating the negative effects of climate change. We estimate the costs associated with the adaptive investment effect using data on Chinese provinces and find that the impact of investment on economic growth is reduced by between 27% and 37% in provinces investing more in adaptive capital. This implies that the social cost of carbon is higher than existing studies suggest, making it more urgent for policymakers to take action against climate change.

Energy Dependency and Long-Run Growth

“…This choice is endorsed by several applied econometrics papers, i.e. Chudik et al (2016), Kahn et al (2019), Jarrett et al (2019) and Mohaddes and Williams (2020). Moreover, we add a cross-sectional augmentation of the dependent variable and the regressors to account for the presence of cross-sectional dependence and endogeneity in our data 6 .…”

“…As proposed in , we proxy the unobserved common factors term, λ i f t , with the cross-sectional average of the dependent variable and we deal with the cross-sectional dependence of regressors including their cross-sectional augmentation. Finally, as in Jarrett et al (2019) and Mohaddes and Williams (2020), we rely on the Pooled Mean Group estimator (PMG) because we are interested in estimating the long-run effect of energy price changes on economic growth in a specific set of countries rather than the individual long-run response of each country.…”

Climate change and economic activity: Evidence from US states

“…For a discussion of costs associated with diverting funds away from productive capital, seeMohaddes and Williams (2020). Other reasons for underinvestment include knowledge spillovers and networks externalities.12 See Appendix A for further details.…”