The Marginal Product of Climate

60 Pages Posted: 6 Dec 2017

See all articles by Tatyana Deryugina

Tatyana Deryugina

University of Illinois

Solomon Hsiang

University of California, Berkeley; National Bureau of Economic Research

Date Written: November 2017

Abstract

We develop an empirical approach to value changes to a climate in terms of total market output given optimal factor allocations in general equilibrium. Our approach accounts for unobservable heterogeneity across locations as well as the costs and benefits of adaptation in climates of arbitrary dimension. Importantly, we demonstrate that the Envelope Theorem implies the marginal product of a long-run climate can be exactly identified using only idiosyncratic weather variation. We apply this method to the temperature climate of the modern United States and find that, despite evidence that populations adapt, the marginal product of temperature has remained unchanged during 1970-2010, with high temperatures having low net value. Integrating marginal products recovers a value function for temperature, describing the causal effect of non-marginal climate changes net of adaptive re-optimization. We use this value function to consider the influence of temperature in the current cross-section and a future climate change scenario.

Suggested Citation

Deryugina, Tatyana and Hsiang, Solomon, The Marginal Product of Climate (November 2017). NBER Working Paper No. w24072. Available at SSRN: https://ssrn.com/abstract=3082233

Tatyana Deryugina (Contact Author)

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://deryugina.com

Solomon Hsiang

University of California, Berkeley ( email )

2607 Hearst Avenue
Berkeley, CA 94720-7320
United States

HOME PAGE: http://gspp.berkeley.edu/directories/faculty/solomon-hsiang

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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