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Weather, Climate and the Economy: Welfare Implications of Temperature Shocks


  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Michael Batu

    (Department of Economics, University of Windsor)


This paper examines the effects of weather shocks and climate change in the economy when rising temperatures independently affect household preferences and production technology. Direct temperature damages to the agent's preferences amplify the negative economic and welfare effects of temporary and permanent temperature increases. In our model, households value nature and dislike energy use in production. Temperature anomalies increase the disutility of energy use leading agents to reduce its use more dramatically when temperature increases. The short-run response of welfare to an unanticipated change in temperature is remarkably different when temperature directly affects preferences - welfare rises initially and then decreases as it returns to its steady state along with the temperature anomaly. Results of our analysis suggest that the consumption equivalent welfare for a 2.0C permanent increase in temperature is approximately 3 percent of GDP.

Suggested Citation

  • Marcelo Arbex & Michael Batu, 2017. "Weather, Climate and the Economy: Welfare Implications of Temperature Shocks," Working Papers 1707, University of Windsor, Department of Economics.
  • Handle: RePEc:wis:wpaper:1707

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    References listed on IDEAS

    1. Gallic, Ewen & Vermandel, Gauthier, 2020. "Weather shocks," European Economic Review, Elsevier, vol. 124(C).
    2. Chris Papageorgiou & Marianne Saam & Patrick Schulte, 2017. "Substitution between Clean and Dirty Energy Inputs: A Macroeconomic Perspective," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 281-290, May.
    3. 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.
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    Cited by:

    1. Panagiotis Tzouvanas & Renatas Kizys & Ioannis Chatziantoniou & Roza Sagitova, 2019. "Can Variations in Temperature Explain the Systemic Risk of European Firms?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(4), pages 1723-1759, December.

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    More about this item


    Business Cycles; Welfare Costs; Temperature Shocks; Climate Change.;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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

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