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.
Understanding the link between temperature and educational outcomes is important in assessing the welfare impacts of climate change, especially given the potential for persistent impacts on human capital accumulation and income growth. Using student-level administrative data for New York City public schools, I estimate the impact of hot temperature on high-stakes exams and subsequent educational outcomes. Hot days reduce performance by up to 15% and lead to lasting impacts on educational attainment. These effects persist despite the availability of cooling technologies and strategic teacher responses, suggesting that adaptation to climate change may be especially slow in educational settings.
We explore the labor-related production impacts of temperature stress both for its own interest and to understand the role of adaptation in responding to climate change. Focusing on non-agricultural sectors in the United States, we find that hot temperatures exert a causal, negative impact on county-level payroll -- reducing payroll by several percentage points in a 2C hotter year -- with larger impacts in highly exposed industries such as construction and manufacturing. We assess differences in implied adaptation investments across regions with varying incentives for long-run adaptation, and find evidence consistent with hotter climates being better adapted to hot weather.
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.