The Global Impacts of Climate Change on Risk Preferences

Abstract

We study the direct impacts that long-run experiences of climate change have on individual risk preferences. Using panel surveys from Indonesia and Mexico (total N = 25,000), we link within-person changes in elicited risk preferences to state-level, lifetime experiences of climate change. In line with the predictions of a Bayesian model of learning over background climate risk, we find that in both settings increases in the experienced means of temperature and precipitation cause significant decreases in measured risk aversion, while increases in the experienced variance of temperature in Indonesia and the variance of precipitation in Mexico lead to significant increases in measured risk aversion. We replicate this analysis globally using a survey with a representative sample from 75 countries (N = 75,000) containing an elicited measure of risk preference which we link to country-level, lifetime climate experiences. We find significant results for both the means and variances of both climate variables that are consistent with our panel analyses. Across all settings, experiences of climate variance have first-order effects, with coefficient magnitudes of the standard deviation of climate 0.6-2.6 times that of the climate mean. We develop a novel method for estimating the welfare effects of observed risk preference changes using panel data, and find that the climate-induced changes in risk preferences we observe increased welfare in both Indonesia and Mexico by approximately 1%.

Keywords: risk preferences, climate change, experience effects, volatility, welfare

JEL Classification: D14, D81, D83, I31, O12, Q54