EnvironEconImpact

EnvironEconImpact - The Economic Impacts of Climate Change...

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The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather By O LIVIER D ESCHE ˆ NES AND M ICHAEL G REENSTONE * This paper measures the economic impact of climate change on US agricultural land by estimating the effect of random year-to-year variation in temperature and precipitation on agricultural profits. The preferred estimates indicate that climate change will increase annual profits by $1.3 billion in 2002 dollars (2002$) or 4 percent. This estimate is robust to numerous specification checks and relatively precise, so large negative or positive effects are unlikely. We also find the hedonic approach—which is the standard in the previous literature—to be unreliable be- cause it produces estimates that are extremely sensitive to seemingly minor choices about control variables, sample, and weighting. ( JEL L25, Q12, Q51, Q54) There is a growing consensus that emissions of greenhouse gases due to human activity will lead to higher temperatures and increased pre- cipitation. It is thought that these changes in climate will have an impact on economic well- being. Since temperature and precipitation are direct inputs in agricultural production, many believe that the largest effects will be in this sector. Previous research on climate change concerning the sign and magnitude of its effect on the value of US agricultural land is incon- clusive (see, for example, Richard M. Adams 1989; Robert Mendelsohn, William D. Nord- haus, and Daigee Shaw 1999; David L. Kelly, Charles D. Kolstad, and Glenn T. Mitchell 2005; Wolfram Schlenker, W. Michael Hane- mann, and Anthony C. Fisher (henceforth, SHF) 2005, 2006). Most prior research employs either the pro- duction function or hedonic approach to esti- mate the effect of climate change. 1 Due to its experimental design, the production function approach provides estimates of the effect of weather on the yields of specific crops that are purged of bias due to determinants of agricul- tural output that are beyond farmers’ control (e.g., soil quality). Its disadvantage is that these * Desche ˆnes: Department of Economics, University of Cal- ifornia, Santa Barbara, 2127 North Hall, Santa Barbara, CA 93106 (e-mail: [email protected]); Greenstone: MIT De- partment of Economics, E52-359, 50 Memorial Drive, Cam- bridge, MA 02142-1347 (e-mail: [email protected]). We thank the late David Bradford for initiating a conversation that motivated this paper. Our admiration for David’s brilliance as an economist was exceeded only by our admiration for him as a human being. We are grateful for the especially valuable criticisms from David Card and two anonymous referees. Orley Ashenfelter, Doug Bernheim, Hoyt Bleakley, Tim Con- ley, Tony Fisher, Victor Fuchs, Larry Goulder, Michael Hane- mann, Barrett Kirwan, Charlie Kolstad, Enrico Moretti, Marc Nerlove, Jesse Rothstein, and Wolfram Schlenker provided insightful comments. We are also grateful for comments from seminar participants at Cornell University, University of Mary- land, Princeton University, University of Illinois at Urbana-
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