Tuesday, March 9, 2010

How to Demonstrate the Value of Climate

All you get this morning are some inconclusive musings.

My gut feel is that people care quite a bit about local climate, and in particular that at least some people have at times relocated based on climate.  Whether it's people living in New York leaving for Florida or California, or the British retiring to Spain and France, it's clear that people move for this reason.

It's likely that this has an effect on house prices, and my guess is that the size of the effect is not trivial and could potentially be used to measure how much people care about an equable climate.  However, it's obviously not straightforward at all to disentangle the effect from all the other effects on house prices - strength of the local economy, qualities of the housing stock, zoning restrictions preventing easy expansion of the housing market, etc, etc.

A quick search on scholar.google.com turned up a few interesting references - there's obviously the beginning of a literature on this.  For example, Hedonic Pricing of Climate Change Impacts to Households in Great Britain by Katrin Redahnz says in the abstract:
This study investigates the amenity value of climate to British households. By using the hedonic price approach, the marginal willingness to pay for small changes in climate variables, specified as averages and ranges, is derived. The estimates suggest that British people would typically prefer a greater distribution of precipitation across the seasons (i.e. holding annual precipitation constant, drier summers and wetter winters are preferred). Higher temperature ranges are likely to reduce welfare. Moderate global warming with warmer winters and drier summers might thus benefit British households. In particular we find that those places with little or average range in rainfall like Nottingham and those with a huge range of annual temperature like the Boroughs of London might profit. Places already characterized by a broad range of annual precipitation like Aberdare in Mid Glamorgan on the other hand would most likely lose from climate change.
Cragg and Kahn, New estimates of climate demand: evidence from location choice says
We develop and apply to Census data a new method for estimating climate demand. The method is useful for ranking quality of life based upon a willingness to pay criterion. Our two major findings are that the willingness to pay quality of life index is correlated with the hedonic approach’s ranking but that the migration approach generates much larger estimates of willingness to pay for a more moderate climate. This finding is relevant for evaluating the economic impact of global warming.
and, most interestingly, Rehdanz and Maddison have a paper Climate and Happiness
Climate is an important input to many human activities. Climate affects heating and cooling requirements, determines clothing and nutritional needs and limits recreational activities. As such it is to be expected that individuals will have a preference for particular types of climate.
These preferences have indeed been observed using a variety of approaches including regional analyses of wage rates and land prices, the propensity to migrate, and analyses based on household consumption patterns.
Mindful of existing research this paper analyses a panel of 67 countries attempting to explain differences in self-reported levels of happiness by reference to amongst other things temperature and precipitation. Various indices are used for each of these variables including means, extremes and number of months with a particular climate like the number of hot and cold months.
Using a panel-corrected least squares approach the paper demonstrates that, even when controlling for a range of other factors, climate variables have a particularly powerful effect on self reported levels of happiness. Furthermore there is a correspondence between the findings that emerge from this analysis and earlier studies with respect to what constitutes a preferred climate.
The relationship between climate and self reported happiness is of particular interest because of the much discussed threat of anthropogenically induced climate change. Differential patterns of warming along with a changed distribution of rainfall promises to alter dramatically the distribution of happiness between nations with some countries moving towards a preferred climate and others moving further away. We find that higher mean temperatures in the coldest month increase happiness, whereas higher mean temperatures in the hottest month decrease happiness. Precipitation does not significantly affect happiness. 
In particular high latitude countries included in our dataset might benefit from temperature changes. Countries already characterized by very high summer temperatures would most likely suffer losses from climate change.
I don't have an opinion on the quality of these analyses at the moment - in the past I have not always found regression analyses by economists persuasive - but it seems like an interesting and important line of thought.

1 comment:

Geoff said...

We're facing these issues in real life at the moment as we research to find a new place to live. We're migrating from hot, currently drought stricken summers and cold winters primarily due to the thought that there is the potential that summers will get hotter and drier. Whilst nothing is certain, we view this risk with greater concern than the possibility things will stay the same or improve.

As "peakists", climate criteria are heavily weighted above all others, but unlike the conclusion in the last reference that precipitation does not significantly affect happiness it is one of our prime factors for consideration. We'll be happy if we get enough rain to grow food.

With that in mind I'd say that consideration of climate will differ significantly between those who are interested in growing their own food (ie surviving an uncertain future under their own steam) and those who are more interested in recreation. The former would have somewhat more logical reasons for choosing one climate over another (I'd hope!), whilst the latter are operating largely on emotion. Given that the current split between the two would weigh heavily in favour of the emotion driven group then any analyses are similarly going to be skewed.

In a similar vein, our Oz television had a show about the impact of climate change on coastal communities, and a real-estate agent mentioned that they weren't currently seeing any lowering of high prices for coastal living, indicating that regardless of the potential for trouble such as flooding and coastal erosion, people were still more than willing to move to the coast and pay the premiums involved purely for lifestyle.