by David Maddison
Enormous research effort has gone into determining the effect of Greenhouse Gas (GHG) emissions on the global climate, figuring out the impacts of climate change on the natural world and estimating the costs of abating GHGs. By contrast, much less effort has gone into valuing in monetary terms the impacts of climate change. In particular, there is in the climate change literature surprisingly little discussion about the direct impact of climate change on households. Although some of the impact of climate change on households might be felt through changes in incomes or changes in the prices of goods and services, the direct impact on households deserves far more attention.
Why might households prefer particular sorts of climate?
Why might households prefer particular sorts of climate (and hence care about climate change)? Put differently, why does climate have an amenity value? The reason is that households have basic needs for warmth, shelter, clothing, and nutrition. But whilst these needs can certainly be met by purchasing goods and services they are nonetheless influenced by the climate. Households inhabiting certain climates may find that they need to spend more than others. The most obvious example concerns households’ need for warmth. Households can modify indoor temperature by heating or cooling neither of which is essential in milder climates. Households inhabiting such climates can use their income for other things. Likewise, climate alters people’s calorific requirements and different types of climate necessitate different types of clothing.
The observation that basic needs are met in part by the climate has several consequences. First, it is likely that households inhabiting different climates exhibit different expenditure patterns even if they are confronted by the same prices and the same income. Second, it is likely that those households that are already poor might find themselves more vulnerable to a deleterious change in the climate (and more benefitted by a favourable change). Poorer households have a lot at stake from climate change.
The climate of the Mediterranean is often regarded as optimal probably because the cost of living is lower. How much would your household be willing to pay to inhabit the sort of climate that that the city of Nice currently enjoys is not a silly question; neither is the question of how much households in Nice are willing to accept as compensation for a change in their climate to one less pleasant. But despite it being difficult if not impossible to answer such a question directly nevertheless households are already implicitly valuing climates. Their implicit valuations reveal a lot about how households in different locations might be directly impacted by climate change.
A look at the different sorts of evidence
Empirical evidence exists that households indeed possess preferences over climate that can be measured in terms of monetary values. First, theory suggests that preferences for climate result in regional variations in house prices and wage rates. The price of properties in areas characterised by a more desirable climate is bid upwards whilst for wage rates the opposite happens. Remarkably empirical studies are able to provide estimates of the compensating price differential for marginal changes in climate variables i.e., the implicit value of an additional 1ºC or 1mm of precipitation.
One problem with such studies is the assumption that individuals are willing to move considerable distances to eliminate the net benefits of different locations. This is problematic because climate variables differ only at considerable distances. A second problem is it may not be possible to use the same approach in small countries where the climate is homogeneous. It is for this reason that studies confine themselves examining the evidence for those countries that contain different climates e.g., the US or Italy.
Other evidence suggests that households inhabiting particular sorts of climates do indeed purchase different patterns of goods and services. This is of course consistent with the story concerning the influence of climate on households’ needs. Analysing differences in consumption patterns is routinely undertaken to calculate household equivalence scales. These convey information about how much more money households with e.g., an extra adult or child require as a one-person reference household. Here however, the approach is used to calculate climatic equivalence scales i.e., how much extra money do households inhabiting a particular climate require to achieve the same utility level as another household living in some reference climate.
A third valuation technique asks households about the minimum income required for them to achieve a particular level of welfare e.g., “subsistence only” or “good” or “very good” given the specific circumstances of the household. This approach also confirms that households inhabiting particular climates require very different amounts of income to achieve the same welfare level. The technique assumes that all households share the same understanding of different labels for describing various welfare levels. The most compelling way of finding the implicit value that households place on climate variables however is to ask households in different locations how happy or satisfied they are.
Studies connecting happiness or life satisfaction and climate
Many national statistical agencies conduct yearly surveys on happiness or life satisfaction / subjective wellbeing. These survey data are usually supplemented by information gathered on the precise socioeconomic conditions of the individual and information on their local environment. These data studies investigate the effects of the personal circumstances, macroeconomic conditions, and environmental quality on subjective wellbeing. Although most studies involve individual countries a few surveys are for multiple countries using the same questionnaire.
To better appreciate what such an approach entails, respondents to such surveys are typically confronted by a question such as the following one, which is taken from the World Values Survey: All things considered, how satisfied are you with your life as a whole these days? Using this card on which 1 means you are “completely dissatisfied” and 10 means you are “completely satisfied” where would you put your satisfaction with your life as a whole?
Using data from multi-country surveys, researchers have attempted to explain why people in some countries are less satisfied with their lives than those living elsewhere. Many variables have been touted as potential explanations, most often income as well as political and press freedom. Other important variables include macroeconomic variables such as inflation and unemployment, both of which are known to make individuals unhappy.
Over recent years researchers have also used these data to investigate the importance of climate to subjective wellbeing. This is achieved by comparing subjective wellbeing in countries characterised by different climates. There appears a remarkable relationship between climate and subjective wellbeing – survey respondents consistently report higher subjective wellbeing if they inhabit particular sorts of climates. Of course, some countries that have miserable climates such as Denmark (sorry Denmark) consistently report high levels of subjective wellbeing. But that is because Denmark also has a very high GDP per capita whereas the appropriate comparison is between countries where GDP per capita and everything else is held constant.
The sorts of climates that do most to promote happiness and life satisfaction appear to be climates not associated with extremes. Some papers find that countries reporting the highest subjective wellbeing are those remaining close to a mean temperature of 65ºF all year round. Others find that higher temperatures in the warmest month reduce subjective wellbeing whilst higher temperatures in the coldest month increase subjective wellbeing. Such findings resemble the findings from the other approaches outlined above as what sort of climates households prefer. It is also possible to derive from these studies estimates of the implicit value of climate variables by asking what change in GDP per capita would be necessary to hold subjective wellbeing constant for a unit change in any climate variable. These amounts suggest that differences in climate go a long way to explaining cross-country variations in subjective wellbeing.
These such studies seek a relationship between measures of subjective wellbeing and climate not weather. Although there does appear to be a relationship between weather and measures of subjective wellbeing it is not appropriate to use such evidence to predict the impacts of climate change. The reason is that if what is currently unusual weather eventually becomes the norm households will adapt. What matters for climate change are differences in subjective wellbeing as evaluated by individuals that have already adapted.
Problems that remain to be solved
The evidence suggesting that households have preferences for particular sorts of climate needs to be improved. For example, investigators have hitherto investigate the amenity value of only a limited number of climate variables, typically temperature. Other variables such as days of sunshine are less often included. Even temperature can be measured in different ways e.g., average temperature or maximum daytime temperature. Other studies use the concept of heating and cooling degree days employing 65ºF as a base. This diversity matters because different ways of representing the climate frustrate attempts at comparing the results of different studies.
Another problem is that for many studies looking at subjective wellbeing and the climate the data is only available at the level of the country and not the respondent. This might be acceptable if all countries were as small as Malta. However, if one is including large countries such as the US then it becomes necessary to average the climates over the main population centres – hardly ideal. But that climate variables should still show up so strongly despite such problems simply serves to further confirm their importance.
It is also important to point out that not only do techniques identify the direct impact of climate on households they might also pick up some indirect impacts. More specifically, certain sorts of climate also support particular sorts of fauna and flora. Accordingly, it is impossible to determine the extent to which observed preferences for climate are in in fact preferences over different sorts of fauna and flora. This may not matter, but if the speed of climate change prevents fauna and flora adjusting things might start to look different.
Lastly, notice that the approaches outlined above are in effect using existing differences over space as an analogue for future climate change. This however might not be entirely adequate insofar as we are using the results of these studies to make predictions about the impact of climate change on future generations. Future technology and growth in incomes might mean that climate change is evaluated differently by future households.
Implications of the literature
Many studies referred to above report the amenity value of climate variables i.e., the monetary amount that the average individual or household would be willing to pay to obtain / avoid e.g., a 1ºC rise in mean temperature or an additional 1mm of precipitation. These amounts might be positive or negative depending on the baseline climate and according to household income. Some researchers have actually combined these estimates with actual predictions about how climate is forecast to change in order to get an overall monetary valuation (although it is always necessary to be mindful of the fact that the direct impact of climate change on households is not the only way climate change might impact households). These calculations point to significant gains for households in some locations and significant losses in others. Climate change is certainly not a one-way street.
Valuing these the impacts of climate change in monetary terms may seem an arcane pursuit. However, demonstrating how much households in some countries stand to lose (and in some instances gain) might have a salutary effect on Governments in upcoming COP discussions for whom the question whether voters are willing to pay for costly measures intended to cut GHG emissions looms large. More generally, better estimates of the impacts of climate change expressed in monetary terms are likely to be of interest to anyone engaged in the sort of cost benefit analyses undertaken in the Stern Review.
It seems difficult to argue that climate change will not have a profound direct impact on households. Furthermore, households living in different locations will probably have a very different view of climate change. Households implicitly reveal their preferences for particular sorts of climate in a variety of ways. Greater use of this evidence, ideally expressed in terms of monetary values, will help to focus minds as the world decides how aggressively to limit GHG emissions.