A Forward Looking Ricardian Approach: Do Land Markets Capitalize Climate Change Forecasts?

46 Pages Posted: 18 Jul 2016

See all articles by Christopher Severen

Christopher Severen

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Christopher Costello

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management

Olivier Deschenes

University of California, Santa Barbara - College of Letters & Science - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: July 2016

Abstract

The hedonic pricing method is one of the fundamental approaches used to estimate the economic value of attributes that affect the market price of an asset. In environmental economics, such methods are routinely used 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. This extensively-applied approach contains an important implicit assumption that current land markets ignore current 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. We show how to account for this with a straightforward empirical correction (called the Forward-Looking Ricardian Approach) that can be implemented with readily available data. We apply this empirically to agricultural land markets in the United States and find evidence that these markets already are accounting for climate change forecasts. Failing to account for this would lead a researcher to understate climate change damages by 36% to 66%.

Suggested Citation

Severen, Christopher and Costello, Christopher and Deschenes, Olivier, A Forward Looking Ricardian Approach: Do Land Markets Capitalize Climate Change Forecasts? (July 2016). NBER Working Paper No. w22413. Available at SSRN: https://ssrn.com/abstract=2810923

Christopher Severen (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Christopher Costello

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management ( email )

4670 Physical Sciences North
Santa Barbara, CA 93106-5131
United States
(805) 893-5802 (Phone)
(805) 893-7612 (Fax)

Olivier Deschenes

University of California, Santa Barbara - College of Letters & Science - Department of Economics ( email )

UC Santa Barbara
Santa Barbara, CA 93106
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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