The Economic Effects of Climate Change in Dynamic Spatial Equilibrium

Abstract

We develop a dynamic-spatial equilibrium model to quantify the economic effects of climate change with a focus on the United States. We find that climate change reduces US welfare by 4% and global welfare by over 20%. Market- based adaptation through trade and labor reallocation increases US welfare, but with substantial spatial heterogeneity. Adaptation through labor reallocation and trade are complementary: together they boost welfare by 50% more than their individual effects. We additionally develop a new dynamic envelope theo- rem method for measuring welfare impacts in reduced form and to validate our quantitative model. We find that welfare distributions from our two approaches are consistent, indicating that our quantitative model captures the first-order factors for measuring the distributional impacts of climate change. The level and distribution of the economic impacts of climate change depends the sectoral and spatial structure of the economy, and the extent to which different markets can adapt.