Temperature Shocks: Growth and Unemployment in the EU


There are lots of shocks hitting the European Union (EU), for example Energy Shocks and Floods, Drought and Heat Waves. In this post, I'm going to look at the effect of Surface Temperature shocks on the EUL20 Model.

The  EUL20 Model has three component state variables: EU1 = (Growth), EU2 = (CO2-LU) and EU3 = (LU-GDP-N), that is, Overall Growth, a controller for CO2 Emissions-Unemployment (LU) and a controller for Unemployment-Output-Population. From the shock decomposition diagram above, a global temperature shock has negative effects on all three state variables (see the EUL20 TEMP Model below). In each case, the system responds positively after a few years but does not return to full equilibrium until around ten years. In other words, repeated yearly temperature shocks will cumulate and continue damaging the economy over time.



Source: European Environmental Agency

Additionally, over time, surface temperatures in the EU are expected to keep rising above 1930 levels, amplifying shock effects--even thought the shocks themselves, in standard deviation units, are small.

Also, the EUL20 TEMP Model below has one unstable component, the Unemployment-Output-Population, while the CO2-LU controller is stable and explains more variation.

Notes

You can run the   EUL20 Model  yourself using R-code on my Google Site. The  EUL20 Model  itself is stable and forecast to reach a steady state around 2046.




Questions



Use the Direct Graph above (based on the Kaya Identity) to understand the effects of positive and negative feedback effects (dashed lines) from a Global Temperature (T) SHOCK.
  1. How might the (CO2-LU) controller work in the face of a Global Temperature shocks?
  2. How might the  (LU-GDP-N) controller work in the face of Global Temperature shocks?
  3. How might instability (a > 1.0, unstable economic growth) affect the Unemployment-Output-Population controller?
  4. How else might increasing Global Temperature levels affect the EU economies?
  5. What might be done to mitigate the effects of Heat Waves? Consider modifying the "intensive coefficients" (n,u=normal rate of unemployment,q,e,c,t and a=growth rate of production).

EUL20 Measurement Model



EU1 = (Growth), EU2 = (CO2-LU) and EU3 = (LU-GDP-N) explaining 99.6% of the variation in the State Space indicators.



EUL20 TEMP Model



The EUL20 TEMP Model (above) is unstable from the unstable Unemployment-Output-Population controller. Notice that the TEMP coefficients in the G matrix are all negative meaning that increases in global temperature have a negative effect in the EU model.


 

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