Fig. 1: Illustration of the investment effect.
From: Investment incentive reduced by climate damages can be restored by optimal policy
Climate change reduces productivity, which translates into direct income losses (blue boxes). The prospect of reduced investment returns in the future renders investment less attractive. Accordingly, economically optimal investment is reduced and less production enhancing capital is accumulated. As a result, economic growth slows down and yields a future of persistently lowered income. This effect arising through reduced investment incentives is here referred to as the additional investment effect (depicted by red boxes).
