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The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather

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  • Deschenes, Olivier
  • Greenstone, Michael

Abstract

This paper measures the economic impact of climate change on US agricultural land. We replicate the previous literature's implementation of the hedonic approach and find that it produces estimates of the effect of climate change that are very sensitive to decisions about the appropriate control variables, sample and weighting. We find estimates of the benchmark doubling of greenhouse gases on agricultural land values that range from a decline of $420 billion (1997$) to an increase of $265 billion, or -30% to 19%. Despite its theoretical appeal, the wide variability of these estimates suggests that the hedonic method may be unreliable in this setting. In light of the potential importance of climate change, this paper proposes a new strategy to determine its economic impact. We estimate the effect of weather on farm profits, conditional on county and state by year fixed effects, so the weather parameters are identified from the presumably random variation in weather across counties within states. The results suggest that the benchmark change in climate would reduce the value of agricultural land by $40 to $80 billion, or -3% to -6%, but the null of zero effect cannot be rejected. In contrast to the hedonic approach, these results are robust to changes in specification. Since farmers can engage in a more extensive set of adaptations in response to permanent climate changes, this estimate is likely downwards biased, relative to the preferred long run effect. Together the point estimates and sign of the likely bias contradict the popular view that climate change will have substantial negative welfare consequences for the US agricultural sector.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt6w7242cj.

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Date of creation: 01 Jul 2004
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Handle: RePEc:cdl:ucsbec:qt6w7242cj

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Keywords: global climate change; agricultural profits; hedonic regressions; fixed-effects models;

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  1. Dan A. Black & Thomas J. Kniesner, 2003. "On the Measurement of Job Risk in Hedonic Wage Models," Center for Policy Research Working Papers 49, Center for Policy Research, Maxwell School, Syracuse University.
  2. Mendelsohn, Robert & Nordhaus, William D & Shaw, Daigee, 1994. "The Impact of Global Warming on Agriculture: A Ricardian Analysis," American Economic Review, American Economic Association, vol. 84(4), pages 753-71, September.
  3. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2000. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," NBER Working Papers 7831, National Bureau of Economic Research, Inc.
  4. Kenneth Y. Chay & Michael Greenstone, 2005. "Does Air Quality Matter? Evidence from the Housing Market," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 376-424, April.
  5. Michael Greenstone & Justin Gallagher, 2005. "Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program," Working Papers 2005.149, Fondazione Eni Enrico Mattei.
  6. Plantinga, Andrew J. & Lubowski, Ruben N. & Stavins, Robert N., 2002. "The effects of potential land development on agricultural land prices," Journal of Urban Economics, Elsevier, vol. 52(3), pages 561-581, November.
  7. Ivar Ekeland & James J. Heckman & Lars P. Nesheim, 2003. "Identification and Estimation of Hedonic Models," NBER Working Papers 9910, National Bureau of Economic Research, Inc.
  8. Jinxia Wang & Robert Mendelsohn & Ariel Dinar & Jikun Huang & Scott Rozelle & Lijuan Zhang, 2009. "The impact of climate change on China's agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 40(3), pages 323-337, 05.
  9. Barrett E. Kirwan, 2009. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 138-164, 02.
  10. Kelly, David L. & Kolstad, Charles D. & Mitchell, Glenn T., 2005. "Adjustment costs from environmental change," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 468-495, November.
  11. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  12. Sandra E. Black, 1997. "Do better schools matter? Parental valuation of elementary education," Research Paper 9729, Federal Reserve Bank of New York.
  13. Wolfram Schlenker & W. Michael Hanemann & Anthony C. Fisher, 2005. "Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach," American Economic Review, American Economic Association, vol. 95(1), pages 395-406, March.
  14. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September.
  15. Cline, William R, 1996. "The Impact of Global Warming on Agriculture: Comment," American Economic Review, American Economic Association, vol. 86(5), pages 1309-11, December.
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  1. Climate change and agriculture in Wikipedia English ne '')
  2. Wikipedysta:Adi/Skutki globalnego ocieplenia in Wikipedia Polish ne '')
  3. Cambio climático y agricultura in Wikipedia Spanish ne '')

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