Climate change could affect many aspects of human life in the future and some predictions are dire. New research with sub-national level data by Christina Gresser (University of Bayreuth), Daniel Meierrieks (WZB Berlin Social Science Center) and David Stadelmann (University of Bayreuth) provides a tiny glimpse of hope, at least regarding human material welfare approximated by income levels.

Exploring links between economic development and average temperatures using data for sub-national administrative units such as states and provinces, their study finds that regions within countries are not per se wealthier or poorer only because they are hotter or colder. Nevertheless, while humans seem to have been able to adapt successfully to different climatic conditions in the past, present-day climate change could pose new challenges and entail potentially prohibitively high adaptation costs.

More…

Identifying drivers of income differences between countries has over decades attracted much attention in economic research. Previous studies suggest that income differences between countries can be explained by differences in institutions, trade, education, health or macroeconomic policies.

Recently, however, an increasing political focus on climate change has increased research interest in the direct role of climatic conditions, especially rising temperatures, in affecting economic development. Empirical results of large and negative effects of temperature on income levels from cross-country comparisons have generated particular interest. Extrapolating from such results until 2100 suggest relevant reductions in material welfare.

The new research explores the relationship between economic development and average temperatures using regional data – that is, data for sub-national administrative units such as states and provinces. The authors find that regions within countries are not per se wealthier or poorer only because they are hotter or colder.

Indeed, there is large regional temperature and income level variation within countries. Temperatures between regions within countries such as Russia or the United States can differ by several degrees. It is possible to find regions within a country that are comparatively hot while still rich, while others are cold and poor.

The authors provide evidence that higher average temperatures need not lead to lower income levels. A centrepiece of their empirical analysis is to account systematically for time-invariant national factors, which might include the stability of political institutions, geographical particularities, etc. Such factors had been systematically analysed when exploring drivers of income levels in the past, but they tended to be overlooked by recent research focusing on negative impacts of higher temperatures.

But negative associations between temperature and income levels become small and statistically insignificant when comparing regions within countries. While no ultimate proof, such results are in line with previous studies showing that national factors such as political institutions, education or trade are more relevant drivers for income levels.

As regions with similar incomes but different temperatures exist within a country, adaptation to different temperatures appears to have been feasible and often successful in the past. Indeed, anecdotal evidence suggests that some of the richest regions in the world are among the hottest and among the coldest in the world (for example, regions in the United Arab Emirates or Canada).

Most likely, within-country economic differences due to climate conditions were moderated by human ingenuity such as through innovation, economic behaviour such as specialisation, migration and trade, as well as policy interventions such as within-country redistribution.

The authors conclude that hotter location does not per se result in lower incomes as humans appear to have been able to adapt successfully to different climatic conditions in the past. But rapid present-day climate change could pose challenges previously not encountered and entail potentially prohibitively high adaptation costs.

‘The link between regional temperature and regional income: econometric evidence with sub-national data’

Authors:

Christina Gresser (University of Bayreuth)

Daniel Meierrieks (WZB Berlin Social Science Center)

David Stadelmann (University of Bayreuth, Centre for Behavioral Economics, Society and Technology (BEST), IREF – Institute for Research in Economic and Fiscal Issues, and CREMA – Center for Research in Economics, Management and the Arts)