Heterogeneity and Market Adaptation to Climate Change in Dynamic-Spatial Equilibrium

Climate change is expected to significantly affect the planet, but the ultimate economic impact depends on the structure of the economy and the extent to which markets can adapt to changes in local climatic conditions. Here we develop a dynamic-spatial multi-industry climate-economy model with several novel forms of heterogeneity. In our model, regions are linked through trade and factor markets, and daily temperature affects productivity growth and local amenities. We first demonstrate how to use equilibrium conditions of the model to estimate climate impacts on growth and amenities accounting for dynamic and spatial behavior. With a focus on the United States, we then simulate our model to quantify the value of adaptation through inter-state migration or by changing workers' industry of employment, which alter production patterns and trade. We find that market adaptation mitigates and even reverses the negative effects of climate change in the US. In total, market-based adaptation improves US welfare by 14 percentage points. Heterogeneity in industrial responses to climate change and within-year temperature variability play a central role in welfare and the benefits of adaptation. Heterogeneous industrial responses make climate change more beneficial by magnifying the benefits of trade and industry switching. Differences in temperature variability across space and time worsen welfare, and depress the value of adaptation through trade, migration, and industry switching. Our findings point to the importance of proper representation of industrial and climatic heterogeneity for quantifying the impacts of climate change and market-based adaptation.