Working Paper: NBER ID: w24072
Authors: Tatyana Deryugina; Solomon Hsiang
Abstract: We develop an empirical approach to value changes to a climate in terms of total market output given optimal factor allocations in general equilibrium. Our approach accounts for unobservable heterogeneity across locations as well as the costs and benefits of adaptation in climates of arbitrary dimension. Importantly, we demonstrate that the Envelope Theorem implies the marginal product of a long-run climate can be exactly identified using only idiosyncratic weather variation. We apply this method to the temperature climate of the modern United States and find that, despite evidence that populations adapt, the marginal product of temperature has remained unchanged during 1970-2010, with high temperatures having low net value. Integrating marginal products recovers a value function for temperature, describing the causal effect of non-marginal climate changes net of adaptive re-optimization. We use this value function to consider the influence of temperature in the current cross-section and a future climate change scenario.
Keywords: Climate Change; Economic Output; Adaptation; Marginal Product
JEL Codes: E23; O4; Q5; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic weather variation (Q54) | marginal product of climate (Q54) |
| climate changes (Q54) | total market output (E23) |
| temperature (Y60) | production (L23) |
| hotter climates (Q54) | lower average production (E23) |
| climate differences between counties (H73) | differences in output (C67) |
| projected changes in US production due to warming (F17) | economic impacts from climate change (Q54) |
| marginal damages from warming (Q54) | distribution of economic activity (R12) |