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

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  • Olivier Deschenes
  • Michael Greenstone

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10663.

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Date of creation: Aug 2004
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Publication status: published as Deschenes, Olivier and M. Greenstone. "The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather." American Economic Review 97, 1 (March 2007): 354-385.
Handle: RePEc:nbr:nberwo:10663

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  1. Black, Dan A & Kniesner, Thomas J, 2003. " On the Measurement of Job Risk in Hedonic Wage Models," Journal of Risk and Uncertainty, Springer, vol. 27(3), pages 205-20, December.
  2. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
  3. 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.
  4. Mundlak, Yair, 2001. "Production and supply," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 1, pages 3-85 Elsevier.
  5. Gallagher, Justin & Greenstone, Michael, 2007. "Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program," Working paper 134, Regulation2point0.
  6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  7. Kirwan, Barrett E., 2008. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Working Papers 42714, University of Maryland, Department of Agricultural and Resource Economics.
  8. 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.
  9. 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.
  10. Wolfram Schlenker & W. Michael Hanemann & Anthony C. Fisher, 2006. "The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 113-125, February.
  11. Kenneth Y. Chay & Michael Greenstone, 1998. "Does Air Quality Matter? Evidence from the Housing Market," NBER Working Papers 6826, National Bureau of Economic Research, Inc.
  12. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation Of Elementary Education," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 577-599, May.
  13. 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.
  14. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
  15. 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..
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Cited by:
  1. Jacoby, Hanan & Rabassa, Mariano & Skoufias, Emmanuel, 2011. "Distributional implications of climate change in India," Policy Research Working Paper Series 5623, The World Bank.
  2. Kenneth Y. Chay & Michael Greenstone, 1998. "Does Air Quality Matter? Evidence from the Housing Market," NBER Working Papers 6826, National Bureau of Economic Research, Inc.
  3. 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.
  4. Vasile Burja, 2012. "Reporting The Companiesā€˜ Sustainable Performance In Agriculture," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(14), pages 26.

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