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Temperature shocks and welfare costs

Author

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  • Donadelli, M.
  • Jüppner, M.
  • Riedel, M.
  • Schlag, C.

Abstract

This paper examines the welfare implications of rising temperatures. Using a standard VAR, we empirically show that a temperature shock has a sizable, negative and statistically significant impact on TFP, output, and labor productivity. We rationalize these findings within a production economy featuring long-run temperature risk. In the model, macro-aggregates drop in response to a temperature shock, consistent with the novel evidence in the data. Such adverse effects are long-lasting. Over a 50-year horizon, a one-standard deviation temperature shock lowers both cumulative output and labor productivity growth by 1.4 percentage points. Based on the model, we also show that temperature risk is associated with non-negligible welfare costs which amount to 18.4% of the agent’s lifetime utility and grow exponentially with the size of the impact of temperature on TFP. Finally, we show that faster adaptation to temperature shocks results in lower welfare costs. These welfare benefits become substantially higher in the presence of permanent improvements in the speed of adaptation.

Suggested Citation

  • Donadelli, M. & Jüppner, M. & Riedel, M. & Schlag, C., 2017. "Temperature shocks and welfare costs," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 331-355.
  • Handle: RePEc:eee:dyncon:v:82:y:2017:i:c:p:331-355
    DOI: 10.1016/j.jedc.2017.07.003
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    Cited by:

    1. Riccardo Colacito & Bridget Hoffmann & Toan Phan, 2019. "Temperature and Growth: A Panel Analysis of the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 313-368, March.
    2. Donadelli, Michael & Grüning, Patrick & Jüppner, Marcus & Kizys, Renatas, 2017. "Global temperature, R&D expenditure, and growth," SAFE Working Paper Series 188, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    3. repec:eee:riibaf:v:48:y:2019:i:c:p:111-142 is not listed on IDEAS
    4. repec:eee:ecolec:v:162:y:2019:i:c:p:74-86 is not listed on IDEAS
    5. repec:gam:jsusta:v:11:y:2019:i:11:p:3192-:d:237989 is not listed on IDEAS
    6. Alessi, Lucia & Ossola, Elisa & Panzica, Roberto, 2019. "The Greenium matters: evidence on the pricing of climate risk," Working Papers 2019-12, Joint Research Centre, European Commission (Ispra site).
    7. repec:gam:jsusta:v:11:y:2019:i:4:p:955-:d:205464 is not listed on IDEAS
    8. Marcelo Arbex & Michael Batu, 2017. "Weather, Climate and the Economy: Welfare Implications of Temperature Shocks," Working Papers 1707, University of Windsor, Department of Economics.
    9. Michael Donadelli & Marcus Jüppner & Antonio Paradiso & Christian Schlag, 2019. "Temperature Volatility Risk," Working Papers 2019:05, Department of Economics, University of Venice "Ca' Foscari".

    More about this item

    Keywords

    Temperature shocks; Long-run growth; Asset prices; Welfare costs; Adaptation;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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