How does temperature affect the human capital production process? Evidence from 4.5 million New York City high school exit exams indicates that heat exposure may affect educational performance in both the short and long run. Taking an exam on a 90˚F day relative to a 72˚F day results in a reduction in exam performance that is equivalent to a quarter of the Black-White achievement gap, and meaningfully affects longer-run educational outcomes as well, leading to a 12.3% higher likelihood of failing a subject exam and a 2.5% lower likelihood of on-time high school graduation. Furthermore, cumulative heat exposure over the course of the preceding school year may reduce the rate of learning as seen in exit exam scores, controlling for the short-run effect of exam day temperature. Teachers try to offset some of the impacts of exam day heat stress by selectively boosting grades for students who experience particularly hot exam sittings, perhaps in response to low levels of classroom air conditioning.
How effectively will economic agents adapt to climate change? This study assesses the scope for long-run climate adaptation by comparing the economic impacts of daily heat shocks across varying climatic regions within the United States, using county-level payroll data for non-agricultural industries. For the average U.S. county, an additional day above 90°F results in a -0.05% decline in payroll per capita that year. The impact is 52% larger in industries where workers are routinely exposed to the elements. Regions more prone to extreme heat stress (e.g., Houston) exhibit significantly lower temperature sensitivities than colder ones (e.g., Boston); a year with 10 additional 90°F days reduces output per capita by -2.6% in counties in the coldest quintile and -0.4%, or roughly one fifth that, in the warmest quintile, suggesting significant scope for long-run adaptation to climate change. However, the fact that even the hottest, well adapted regions of the United States suffer economically meaningful production impacts suggests that climate adaptation may entail non-trivial costs without rapid improvement in adaptation technologies.
Does temperature affect macroeconomic performance directly? This paper attempts to bridge micro-level studies of temperature and task performance with recent macro-level studies of economic growth. We do so by presenting a model of labor supply under thermal stress and using country-level panel data to identify temperature-driven productivity impacts. We find that the effect of a hotter year on income and implied TFP varies with a region’s position relative to the optimal climate, so that a positive temperature shock leads to a drop in productivity in hot regions and a rise in cold ones. Countries with relatively low levels of air-conditioning penetration suffer larger implied TFP shocks in hotter years, suggesting that labor-related channels may be contributing considerably to the well-documented statistical relationship between temperature and income.
This article reviews the recent literature on the economics of extreme temperature. There is growing evidence from both micro and macro studies on the causal impacts of short run extreme temperature stress on health, labor supply, and labor productivity, although empirical research on potential adaptive responses in the long run remains thin. We argue that, in addition to providing causally well-identified estimates of heat-related damages, environmental economics has an important role to play in estimating the full welfare costs of temperature stress taking into account behavioral responses and institutional settings.
Putting a price on carbon is critical for climate change policy. Increasingly, policymakers combine multiple policy tools to achieve this, for example by complementing cap-and-trade schemes with a carbon tax, or with a feed-in tariff. Often, the motivation for doing so is to limit undesirable fluctuations in the carbon price, either from rising too high or falling too low. This paper reviews the implications for the carbon price of combining cap-and-trade with other policy instruments. We find that price intervention may not always have the desired effect. Simply adding a carbon tax to an existing cap-and-trade system reduces the carbon price in the market to such an extent that the overall price signal (tax plus carbon price) may remain unchanged. Generous feed-in tariffs or renewable energy obligations within a capped area have the same effect: they undermine the carbon price in the rest of the trading regime, likely increasing costs without reducing emissions. Policymakers wishing to support carbon prices should turn to hybrid instruments — that is, trading schemes with price-like features, such as an auction reserve price — to make sure their objectives are met.