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A Forward-Looking Ricardian Approach: Do land markets capitalize climate change forecasts?

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  • Severen, Christopher
  • Costello, Christopher
  • Deschênes, Olivier

Abstract

The hedonic pricing method is one of the main approaches used to estimate the economic value of attributes that affect the market price of an asset. This method is routinely used in environmental economics to derive the economic valuation of environmental attributes such as air pollution and water quality. For example, the “Ricardian approach” is based on a hedonic regression of land values on historical climate variables. Forecasts of future climate can then be employed to estimate the future costs of climate change. We show that this approach is only valid if current land markets ignore climate forecasts. While this assumption was defensible decades ago (when this literature first emerged), it is reasonable to hypothesize that information on climate change is so pervasive today that markets may already price in expectations of future climate change. Indeed, we show empirically that agricultural land markets in the United States now capitalize expectations about future climate change. We derive a straightforward empirical correction to the standard Ricardian approach (called the “Forward-Looking Ricardian Approach”) that can be implemented with readily available data. Accounting for market beliefs decreases the estimated magnitude of climate change damages by 50%–62%.

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  • Severen, Christopher & Costello, Christopher & Deschênes, Olivier, 2018. "A Forward-Looking Ricardian Approach: Do land markets capitalize climate change forecasts?," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 235-254.
  • Handle: RePEc:eee:jeeman:v:89:y:2018:i:c:p:235-254
    DOI: 10.1016/j.jeem.2018.03.009
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    3. Justin Tyndall, 2021. "Sea Level Rise and Home Prices: Evidence from Long Island," Working Papers 2021-2, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    4. Bunten, Devin & Kahn, Matthew E., 2017. "Optimal real estate capital durability and localized climate change disaster risk," Journal of Housing Economics, Elsevier, vol. 36(C), pages 1-7.
    5. Derek Lemoine, 2017. "Expect Above Average Temperatures: Identifying the Economic Impacts of Climate Change," NBER Working Papers 23549, National Bureau of Economic Research, Inc.
    6. Justin Tyndall, 2021. "Sea Level Rise and Home Prices: Evidence from Long Island," Working Papers 2021-2R, University of Hawaii Economic Research Organization, University of Hawaii at Manoa, revised Sep 2021.
    7. Charles D. Kolstad & Frances C. Moore, 2019. "Estimating the Economic Impacts of Climate Change Using Weather Observations," NBER Working Papers 25537, National Bureau of Economic Research, Inc.
    8. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    9. Sarah E. Anderson & Terry L. Anderson & Alice C. Hill & Matthew E. Kahn & Howard Kunreuther & Gary D. Libecap & Hari Mantripragada & Pierre Mérel & Andrew J. Plantinga & V. Kerry Smith, 2019. "The Critical Role Of Markets In Climate Change Adaptation," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 1-17, February.
    10. Arellano Gonzalez, Jesus, 2018. "Estimating climate change damages in data scarce and non-competitive settings: a novel version of the Ricardian approach with an application to Mexico," 2018 Annual Meeting, August 5-7, Washington, D.C. 274010, Agricultural and Applied Economics Association.
    11. Huijian Dong & Xiaomin Guo, 2020. "Population, Income, and Farmland Pricing in an Open Economy," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 8(4), pages 1-18, October.
    12. Laura A. Bakkensen & Lint Barrage, 2017. "Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?," NBER Working Papers 23854, National Bureau of Economic Research, Inc.
    13. Barrage, Lint & Furst, Jacob, 2019. "Housing investment, sea level rise, and climate change beliefs," Economics Letters, Elsevier, vol. 177(C), pages 105-108.
    14. Daniel J. Wilson, 2016. "The Impact of Weather on Local Employment: Using Big Data on Small Places," Working Paper Series 2016-21, Federal Reserve Bank of San Francisco.
    15. Moretti, Michele & Vanschoenwinkel, Janka & Van Passel, Steven, 2021. "Accounting for externalities in cross-sectional economic models of climate change impacts," Ecological Economics, Elsevier, vol. 185(C).
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    17. Ariel Ortiz‐Bobea, 2020. "The Role of Nonfarm Influences in Ricardian Estimates of Climate Change Impacts on US Agriculture," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 934-959, May.
    18. Gholizadeh, Heydar & Zoghipour, Mohammad Hossein & Torshizi, Mohammad & Nazari, Mohammad Reza & Moradkhani, Narges, 2021. "Gone with the wind: Impact of soil-dust storms on farm income," Ecological Economics, Elsevier, vol. 188(C).
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    More about this item

    Keywords

    Climate change; Climate change and agriculture; Agricultural land prices; Ricardian analysis; Expectations; Climate change forecasts;
    All these keywords.

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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