The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather

46 Pages Posted: 15 Jul 2004 Last revised: 18 Apr 2012

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

Michael Greenstone

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2004

Abstract

This paper measures the economic impact of climate change on US agricultural land by estimating the effect of the presumably random year-to-year variation in temperature and precipitation on agricultural profits. Using long-run climate change predictions from the Hadley 2 Model, the preferred estimates indicate that climate change will lead to a $1.3 billion (2002$) or 4.0% increase in annual profits. The 95% confidence interval ranges from -$0.5 billion to $3.1 billion and the impact is robust to a wide variety of specification checks, so large negative or positive effects are unlikely. There is considerable heterogeneity in the effect across the country with California's predicted impact equal to -$0.75 billion (or nearly 15% of state agricultural profits). Further, the analysis indicates that the predicted increases in temperature and precipitation will have virtually no effect on yields among the most important crops, which suggest that the small effect on profits are not due to short-run price increases. The paper also implements the hedonic approach that is predominant in the previous literature and finds that it may be unreliable, because it produces estimates of the effect of climate change that are extremely sensitive to seemingly minor decisions about the appropriate control variables, sample and weighting. Overall, the findings contradict the popular view that climate change will have substantial negative welfare consequences for the US agricultural sector.

Keywords: Costs of climate change, hedonics, agricultural profits, agricultural production, crop yields

JEL Classification: Q50, Q12, Q54, Q51

Suggested Citation

Deschenes, Olivier and Greenstone, Michael, The Economic Impacts of Climate Change: Evidence from Agricultural Profits and Random Fluctuations in Weather (July 1, 2004). MIT Department of Economics Research Paper No. 04-26. Available at SSRN: https://ssrn.com/abstract=564722 or http://dx.doi.org/10.2139/ssrn.564722

Olivier Deschenes

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

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

Michael Greenstone (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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