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Spatial Dimensions of Climate Change

Paper Session

Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: Econometric Society
  • Chair: Jonathan Eaton, Pennsylvania State University

The economic effects of climate change in dynamic spatial equilibrium

Ivan Rudik
,
Cornell University
Gary Lyn
,
Iowa State University
Weiliang Tan
,
Cornell University
Ariel Ortiz-Bobea
,
Cornell University

Abstract

We present two approaches for analyzing the economic effects of climate change with a focus on the United States: a new dynamic envelope theorem method for welfare effects, and a quantitative dynamic-spatial equilibrium model for comprehensive impacts. We find that climate change reduces welfare globally, but increases welfare in the US. Adaptation through trade and labor reallocation provides moderate net benefits, but with substantial heterogeneity across states. Migration tends to benefit states in the South and harm states in the North, trade has the opposite effect, and reallocation of labor across industries benefits almost all states. Adaptation through labor reallocation and trade are complementary and significantly boost welfare more together than the sum of their individual benefits. We show that structural features of the economic and climate, such as input-output linkages and daily temperature, are essential for properly measuring welfare. We compare welfare estimates from the envelope theorem and quantitative results and find them to be highly consistent, indicating our quantitative model captures the first-order economic factors for climate change. The economic impact of climate change depends on how sensitive different industries are to long run changes in temperature, the industrial and spatial structure of the economy, and the extent to which different markets can adapt to changes in global climatic conditions.

Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity

Frank A. Wolak
,
Stanford University

Abstract

Forward markets are widely believed to aggregate information across market participants about future spot prices and reduce the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in commodity markets with transaction costs, using this measure to show that day-ahead prices better reflect real-time prices at all locations in California's wholesale electricity market after the introduction of financial trading. We then present evidence suggesting that daily average operating costs and input fuel use fell after the introduction of financial trading on days when a significant fraction of the non-convexities in the production and delivery impact the real-time market solution.

Deforestation Dynamics: A Global Perspective

Farid Farrokhi
,
Purdue University
Heitor Pellegrina
,
New York University-Abu Dhabi
Sebastian Sotelo
,
University of Michigan-Ann Arbor

Abstract

This paper studies deforestation from a global and dynamic perspective. We develop a dynamic, multi-country, general equilibrium framework to study the interactions between global trade, productivity, and deforestation. In our framework, forest-conversion decisions are forward-looking and internalize future streams of rents, which means we treat productive land as an asset. Taking our model to data on production, international trade, and deforestation, we show that both agricultural trade liberalization and agricultural productivity growth decrease global deforestation. But along the path to the steady state, these shocks potentially reallocate deforestation across countries. In both cases, the dynamics of structural change regulate the direction and strength of the shocks.

Discussant(s)
Samuel Kortum
,
Yale University
Paul Grieco
,
Pennsylvania State University
Dave Donaldson
,
Massachusetts Institute of Technology
JEL Classifications
  • Q5 - Environmental Economics
  • F3 - International Finance