Economic output under a warming climate: non-linear damage effects and adaptive capacity in OECD countries

Abstract

This study examines the long-run effects of temperature anomalies on economic output in OECD countries, with a focus on non-linear damage patterns and the mitigating role of adaptive capacity. Using annual data for 38 OECD economies over 1995–2024, the analysis estimates panel models with Driscoll–Kraay standard errors within a reduced-form damage-function framework and corroborates long-run robustness using panel FMOLS. The results indicate a non-linear temperature–output relationship: moderate temperature deviations are associated with higher output, but the marginal effect weakens as anomalies intensify, consistent with rising damages at larger deviations from historical norms. Heterogeneity analyses reveal that the temperature–output response is substantially stronger and more non-linear in warm-climate OECD countries, with additional geographic heterogeneity between European and non-European OECD economies. The results further show that higher public investment and stronger health-system capacity are associated with reduced output sensitivity to temperature shocks, with this moderating role being especially pronounced in warmer climates. Taken together, these findings highlight infrastructure and health capacity as measurable, policy-relevant adaptation channels that strengthen macroeconomic resilience to climate variability in advanced economies.