Growth and adaptation to climate change in the long run

As the climate changes, economies are adapting through innovation, demography and structural change. However, adaptation is costly, so reducing future greenhouse gas emissions can improve welfare substantially. To document this, we employ 1960 to 2015 data for the world economy to structurally estimate a Schumpeterian growth model that includes an explicit agriculture sector, endogenous fertility, directed technical change in fossil/renewable energy and climate change feedback. Solving the estimated model for a counterfactual past without climate change, we provide novel evidence on the welfare cost of climate change and isolate the role of different adaptation mechanisms. We then compute the welfare cost of adaptation and optimal carbon taxes over the 21st century.