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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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    Cited by:

    1. Wilson, Daniel J., 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, revised 06 Apr 2017.
    2. repec:eee:jhouse:v:36:y:2017:i:c:p:1-7 is not listed on IDEAS
    3. Derek Lemoine, 2017. "Expect Above Average Temperatures: Identifying the Economic Impacts of Climate Change," NBER Working Papers 23549, National Bureau of Economic Research, Inc.
    4. 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.
    5. Emanuele Massetti & Steven Van Passel & Camila Apablaza, 2018. "Is Western European Agriculture Resilient to High Temperatures?," CESifo Working Paper Series 7286, CESifo Group Munich.

    More about this item

    Keywords

    Climate change; Climate change and agriculture; Agricultural land prices; Ricardian analysis; Expectations; Climate change forecasts;

    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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