Working Paper: NBER ID: w24397
Authors: Maximilian Auffhammer
Abstract: This paper proposes a simple two-step estimation method (Climate Adaptive Response Estimation - CARE) to estimate sectoral climate damage functions, which account for long- run adaptation. The paper applies this method in the context of residential electricity and natural gas demand for the world's sixth largest economy - California. The advantage of the proposed method is that it only requires detailed information on intensive margin behavior, yet does not require explicit knowledge of the extensive margin response (e.g., technology adoption). Using almost two billion energy bills, we estimate spatially highly disaggregated intensive margin temperature response functions using daily variation in weather. In a second step, we explain variation in the slopes of the dose response functions across space as a function of summer climate. Using 18 state-of-the-art climate models, we simulate future demand by letting households vary consumption along the intensive and extensive margins. We show that failing to account for extensive margin adjustment in electricity demand leads to a significant underestimate of the future impacts on electricity consumption. We further show that reductions in natural gas demand more than offset any climate-driven increases in electricity consumption in this context.
Keywords: climate change; electricity consumption; natural gas consumption; adaptation; energy demand
JEL Codes: Q4; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased ambient temperatures (Q54) | higher electricity consumption (L94) |
| higher electricity consumption (L94) | net decrease in energy consumption in the residential sector (Q41) |
| climate-driven reductions in natural gas consumption (Q41) | net decrease in energy consumption in the residential sector (Q41) |
| temperature variations (F44) | energy consumption patterns (Q41) |
| temperature response functions (C22) | short-run adaptations (D29) |
| temperature response functions (C22) | long-run adaptations (D29) |