The Marginal Product of Climate
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.
Portions of this analysis were previously circulated as an NBER working paper under the title "Does the Environment Still Matter? Daily Temperature and Income in the United States." We thank Max Auffhammer, Marshall Burke, Tamma Carleton, Melissa Dell, Olivier Deschenes, Don Fullerton, Michael Greenstone, Hilary Hoynes, Amir Jina, Larry Karp, Bentley Macleod, Kyle Meng, Edward Miguel, Robert Pindyck, Billy Pizer, Jonathan Proctor, Julian Reif, James Rising, Michael Roberts, Francois Salanie, Wolfram Schlenker, Richard Schmalensee, Joe Shapiro, Tony Smith, David Strömberg, James Stock, Anna Tompsett, Reed Walker, Frank Wolak, and seminar participants at Chicago, FEEM, IZA, LSE, MIT, NBER EEE Summer Institute, Princeton, Stanford, Stockholm, Toulouse School of Economics, UC Berkeley, UC Davis, UC Santa Barbara, UI Urbana-Champaign, UNC, and Yale for discussions and comments. We thank Tamma Carleton, Michael Delgado, DJ Rasmussen, and Andrew Wilson for research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.