The impact of climate change on economic growth: time series evidence from Ethiopia

Climate change is one of the greatest environmental challenges facing the world today. It is recognized that climate Change and its associated extreme events will have a wide range of effects on the environment and socioeconomic sectors. Recent experiences of the nation have shown that Ethiopia is vulnerable to climate change. This study has attempted to investigate the impact of climate change on Ethiopian economic growth over a period 1980 to 2012 using vector autoregressive (VAR) approach for analysis. To do so it has employed the growth model adapted from Solow-RCK growth models by incorporating the possible proxy variables for climate change-economic growth and other relevant variables having better explanatory power in the model. On the basis of unit root test result all the variables are found to be integrated of order one 1(1); and then the Johansen ML procedure have been employed to test for the presence and rank of co integration. Accordingly, the co-integration test indicated the presence of one co-integrating equation in the model. The empirical results show that climate change with a proxy variable of temperature has a significant and negative impact on economic growth proxied by real GDP. Conversely, climate change with a proxy variable of rain fall has a significant and positive impact on economic growth on average. Along with these proxy variables other explanatory variables incorporated in the model such as population and human capital having negative-significant and positive-significant impacts on economic growth respectively. Thus, in order to solve the severe impact of climate change with an increase in temperature, climate-related programs (mitigation and adaptation) and policies which reduce the emission of greenhouse gases via using alternative energy sources should be implemented.