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On Thursday, October 1, Esteban Rossi-Hansberg joined Markus’ Academy for a lecture on the economic geography of climate change. Esteban Rossi-Hansberg is a Professor of Economics at Princeton University. He presented joint work with Princeton Economics Ph.D. student José-Luis Cruz.

Watch the full presentation below and download the slides here. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

To effectively study the effects of global warming, models must recognize how its effects will vary worldwide. Standard climate models not only ignore vast local differences in climate damages, but also fail to incorporate behavioral responses and therefore economic adaptation. Rossi-Hansberg’s model emphasizes economic adaptation through migration, trade, and innovation.

A one degree increase in global temperature results in a larger temperature increase in some parts of the world, like Siberia, than other parts of the world, like Australia. In his paper, local characteristics inform a “temperature scaler” that reveals the effects of global warming locally in countries across the world. These characteristics include latitude, longitude, elevation, distance to coast, distance to ocean, distance to water, vegetation density, and albedo.

In some of the hottest places of the world, a 1 degree celsius increase in local temperature decreases amenities (by 2.5%) and productivity (by 10%). In other parts of the world, a 1 degree increase in temperature increases amenities (a measure of quality of life in an area) and productivity.

In the baseline scenario, overall welfare won’t change significantly for many people in the U.S. and Europe, but will decrease substantially for people in Africa, South America, India, and China. In contrast, amenities and productivity will increase for people in the far northern hemisphere. The model estimates, in the baseline scenarios, CO2 emissions won’t drop until 2140 (because we’ve used enough C02 for its cost to start increasing), and temperature increases won’t level off until around 2200.

Lowering migration costs allows people to adapt which diminishes the cost of climate change, but it also expands the economy, therefore using more energy and making climate change worse. More than trade and innovation, ability to migrate plays a large role in the effects on welfare. Countries like Siberia benefit when migration is easy. If costs of migration increase, areas like Siberia will lose while other countries, for example Australia, will benefit.

Carbon taxes create a trade-off between present and future benefits and will be more effective if paired with other technological solutions. Carbon taxes “flatten the curve” of temperature. They lower the use of fossil fuels at first, but because the tax slows the growth in the cost of carbon (by spreading out its use over time), temperatures in Rossi-Hansberg’s model continue to rise until 2200. Rossi-Hansberg shared an analogy that compares the use of a carbon tax to fight global warming with the use of lockdown measures to fight the coronavirus. Like the lockdown measures and a vaccine, he argues, carbon taxes are ultimately more effective if paired with abatement technologies. Rossi-Hansberg says the carbon tax should be pursued, but we need other technological solutions, as well.