A Discrete-Continuous Choice Model of Climate Change Impacts on Energy

Abstract

This paper estimates a multinomial discrete-continuous fuel choice model of both households and firms in order to determine the sensitivity of national energy demand to climate change. We find that consumers switch from natural gas, oil, and other fuels to electricity as climate warms and that overall energy demand - especially electricity demand - increases. The model implies that warming will increase American energy expenditures, resulting in welfare damages that increase as temperatures rise. Increases in electricity expenditures for cooling are partially offset by reductions in expenditures on other fuels for heating. Given a five degree Celsius increase in temperature by 2100, we predict an annual welfare loss of $40 billion, borne primarily by residential customers.

Keywords: climate change, energy demand

JEL Classification: Q25, Q41