In the last century, renowned economist William Baumol warned that economic growth could be limited by “stagnant” sectors—those with limited technological progress. In essence, our future prosperity hinges not just on what we’re good at, but on overcoming what we’re bad at.
A recent paper “Baumol’s Climate Disease” applies this insight to climate impact assessment. Sectors of the economy vary in their vulnerability to climate risks, and when their outputs not easily substitutable, overall climate impacts can intensify. This happens as more vulnerable sectors potentially grow in relative importance, dragging down aggregate resilience.
The paper reveals that this outcome depends on the interplay between technological progress and climate vulnerability. Specifically, climate damages worsen if slower-growing (non-progressive) sectors are also the most vulnerable. On the flip side, if vulnerable sectors are the ones advancing rapidly, accelerated technological innovation can bolster climate resilience.
To demonstrate this, the paper extends the classic DICE model into a dynamic general equilibrium framework with endogenous structural change (see Figure). With the proposed new framework, it uses a straightforward division into just two sectors for clarity. Economic output in both sectors can be used either for consumption or investment. Both sectors are emission-polluting and subject to climate impact.
The paper’s results are novel and particularly important for guiding the allocation of climate adaptation funds and encouraging innovation in sectors with low productivity growth and high climate vulnerability. Moreover, it offers a compelling framework that could significantly advance policy discussions on sustainable development. This accessible approach invites the integrated assessment modeling community to explore further: Which key sectors, as highlighted here, could profoundly shape our ultimate climate impact trajectory?

Wang, F., Liao, H., & Tol, R. S. (2025). Baumol’s Climate Disease. European Economic Review, Volume 180, 105175
https://doi.org/10.1016/j.euroecorev.2025.105175.