The Expectations Channel of Climate Change (ECCC)

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The economic impact of climate change is highly uncertain. Its full extent is likely to become apparent only over the course of several decades (if not centuries). Expectations about climate change, instead, are already capturing peoples’ mind and increasingly so in recent years. This gives rise to a new phenomenon: expectations about climate change influence economic decisions today and thus impact the economy much more strongly – and certainly earlier – than actual climate change. In the project we seek to study this phenomenon, “climate-change expectations” for short, at various levels by pursuing two objectives. One objective is to run an online survey representative of the German population to measure climate-change expectations. The survey will come in a semi-panel of four waves (over the course of one year). It permits us to measure climate-change expectations and their determinants, both in the cross-section and over time. We will also perform information treatments in order to generate exogenous variation in climate-change expectations. We exploit this variation to measure the causal effect of climate-change expectations on (reported) consumption and saving decisions over time. The second objective is to study the effect of climate-change expectations on the business cycle. We do so within a quantitative business-cycle model. As a distinct feature, this model allows for a departure from rational expectations via “diagnostic expectations”. In this way, we can study how shifts in expectations that are not rooted in fundamentals but due to “changing narratives” play out. For instance, the probability assigned to large, climate-change related natural disasters may shift without any change in the objective probability. In this way, our project advances not only our understanding of how (expectations of) climate change impact the economy and thus our way of life, but also informs recent efforts aimed at capturing the nature and implications of the expectation formation process in economics.