Moreover, even though the infrastructure and housing sector represents only a fraction of total economic production in developed countries, it represents a major part of installed capital<sup>10</sup> and replacing this capital would represent a significant burden for the economic system. As a consequence, it is quite possible that an important part of the economic damages caused by climate change will arise from ripple effects, from this sector to the rest of the economy.

In a stylized modeling exercise, Dumas and Hallegatte show that impacts in the infrastructure sector do not necessarily lead to large macroeconomic losses, provided that significant additional investment is carried out quickly to compensate for climate change impacts. In the absence of an adequate amount of investment in the infrastructure sector, total economic losses would increase drastically, with consumption losses over the 21<sup>st</sup> century increasing by 25% (see details in Dumas and Hallegatte, 2009). The model is too simple to provide a precise quantitative statement, but shows the importance of adequate investment in infrastructures and housing to reduce climate change impacts. This fact is crucial, given that infrastructure investments today are far from being optimal both in level and quality (see for instance the drainage infrastructure in Mumbai that cannot cope with the heavy rainfalls that occur every year and are responsible for regular floods in the city).

Considering the fact that infrastructure and housing are strongly regulated sectors, and most of time heavily supported by governments, these results stress both the need for an adequate public response to reduce climate change impacts and the uncertainty of climate change damages created by the mere existence of public policy failures.

# _3.5 Marginal economic impacts, “shifting capacity”, and structural economic impacts_

The difficulty of investing sufficiently rapidly in infrastructure is an issue that can be generalized to other types of impact. As an example, some regions have developed their economies based on a single sector, like tourism or agriculture. In most general equilibrium models used to assess the macroeconomic cost of climate change, if this dominant sector becomes less profitable because of climate change, resources (labor and capital) shift to other, more profitable sectors and climate change leads to a change in economic structure with no significant loss in total production and income. For instance, in models that assume full employment, an inter-sectoral economic shift cannot lead to a surge in unemployment and a large drop in output.

In reality, however, past examples suggest that specialized economies are very vulnerable to changes in the profitability of their main economic sector: in the French regions where mining disappeared in the 1970s, or in deindustrialized regions in the U.S., the economy remained depressed over long periods of time in spite of the large financial support received from the national level.

> 10 In France, investment represents about 25 percent of GDP; investments in infrastructure (including housing) represents about 50 percent of total investment (Louvot, 1996); and the lifetime of infrastructure is about 55 years (100 years for buildings, 30 years for roads, 60 years for electric plants, etc.). Assuming that capital increases by 2 percent a year, we have: 0.125*GDP – Kinfra/55 = Kinfra*0.02. Infrastructure capital, therefore, is approximately equal to 3.3 times GDP. As another way of estimating the value of infrastructure France, one can add transportation infrastructure (several hundreds billion euros), energy infrastructure (about 400 billion euros), water management (200 billion euros), flood protection (a few tens of billion euros) and housing (about 2500 billion euros). The total of this incomplete list already exceeds 3,000 billion euros, i.e. 2 times French GDP. In India, according to the GTAP database, the value of the capital stock is worth 2.13 times annual GDP. Assuming that 75 percent of the capital stock is for infrastructure and housing, and recognizing the difficulty in measuring capital stock (especially public capital stock) and the uncertainty surrounding this value in economic databases, the stock of infrastructure and housing in India is likely to exceed 1.6 times the Indian annual GDP.

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