The Impact of Climatic Shocks on Alberta’s Economy: A Vector Autoregression Analysis

• Author / Creator

  Lu, Wei

• Climate change is posing a major challenge to our environment and economy. Climate change is considered to be more intense for northern regions including Alberta, Canada. Adapting to climate change is essential to mitigate the negative impacts and maintain prosperity for society. However, the lack of regional knowledge of economic impacts of climate change may stall or slow the adaptation. Using a novel approach—the VARX (vector autoregression with exogenous variables) model—this study traces out the quarterly response of economic growth (i.e., total GDP growth, agricultural GDP growth and non-agricultural GDP growth) to two climatic shocks: temperature and precipitation shocks (based on quarter-to-quarter fluctuations in temperature and precipitation) in Alberta, Canada over the period from 1986 to 2007. Our specification of VARX model is based on the theoretical and empirical economic growth literature, thereby, allowing us to isolate climate change effects from other growth determinants. We pay particular attention to controlling for the effect of oil price changes since Alberta is an energy-based province with the largest share of GDP due to the energy sector. The VARX model is able to capture the simultaneous effects of climate change on different economic sectors. We use population-weighted climate variables to account for the different distributions of economic activities and climate variables.
  The results indicate that temperature shocks tend to induce significant and negative impacts on the three types of GDP growth; precipitation shocks tend to result in overall positive (but not significant) impacts on economic growth. The agricultural sector is more sensitive to climatic shocks. Considering both climatic shocks together, we conclude it is more likely that expected future climate change would result in a net negative impact on economic growth, particularly in the agricultural sector, for Alberta. Moreover, the results of a novel in-sample simulation exercise conducted using the VARX model estimates suggest that a 30% increase in temperatures leads to an average reduction of 2% on quarterly agricultural GDP growth during growing season. Precipitation increases may partially alleviate negative impacts from extreme high temperatures especially for agricultural production.
  The results shed light on significant linkages between climate change and its economic impacts as they permeate through output and input markets (viz., and captured in our GDP growth specification). However, climate change could also affect non-market activities such as human health and ecosystem services. It is, therefore, important for future research to investigate the social welfare impacts of climate change that include these non-market effects.

• Subjects / Keywords

  • Climate Change
  • VARX Model
  • GDP Growth
  • Economic Growth

• Graduation date

  Fall 2015

• Type of Item

  Thesis

• Degree

  Master of Science

• DOI

  https://doi.org/10.7939/R3DN4041X

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.