How Does Applied Climate Economics Research Benefit Society?
As I grow older, I continue to be fascinated by whether academic economists are on “equal footing” with the people and firms whose behavior we study. Are we economists a step ahead of the public and private firms in understanding how the economy really works? Or are we a step behind as households and firms are solving problems they face and we economists lag behind as we use historical, incomplete data to study what they did “yesterday”?
For example, suppose a public high school in Baltimore does not have central air conditioning. Central air conditioning is a costly investment and many of Baltimore’s high schools were built a long time ago. Baltimore is a poor city that has many possible uses for its scarce $. In the short run, the City of Baltimore saves $ by not upgrading the local capital stock. Are the Mayor and the people who run the City’s Educational Department aware of what are the medium term effects on local students of studying during increasingly hot April, May, June, September and October months? Climate change is raising Baltimore summer temperatures. What learning costs is this heat exposure imposing on young students who are studying in hot classrooms that do not feature air conditioning?
An impressive recent economics paper quantified this through a brilliant data merge.
Park, R. Jisung, Joshua Goodman, Michael Hurwitz, and Jonathan Smith. "Heat and learning." American Economic Journal: Economic Policy 12, no. 2 (2020): 306-39.
Read this New York Times coverage of their paper.
The authors merged geocoded standardized test core data and local high heat exposure to document that teens learned less (as indicated by test scores) in areas that in the recent past had been exposed to high heat.
Such empirical work provides new information to Baltimore’s leaders about the benefits of paying for central air conditioning in their schools. The “learning loss” would vanish if they make this investment.
The key question here is whether the local officials already knew this relationship before the researchers uncovered it.
Do academic economists with our “Freakonomics” toolkit know more than the decision makers? Or do decision makers already know what we are learning and have decided up until now that the costs of the investment are greater than the benefits.
Academic economists are creative and we do often use our applied micro toolkit to uncover margins of behavior affected by external causes that others may not have not thought of before. Or, more modestly, we figure out a way to quantify the size of an effect that others have considered but couldn’t figure out if they are big deal or not.
For example, in a recent paper of mine; we document that the positive correlation between neighborhood poverty and violent crime grows higher during times of hot temperatures.
Heilmann, Kilian, Matthew E. Kahn, and Cheng Keat Tang. "The urban crime and heat gradient in high and low poverty areas." Journal of Public Economics 197 (2021): 104408.
If the police in Los Angeles didn’t know this result, then on hot days they could dispatch more police cars to poor neighborhoods to patrol to protect people. In our paper, we document that the police are less likely to get out of their air conditioned cars on hot days. They are paid a fixed amount and effort on hot days in even more onerous.
In both of these examples, applied micro estimates expand our imagination about the challenges that climate change is posing. I believe that this type of work triggers investments by the private sector firms to create products to protect us. Many other climate economists believe that their work is an input that raises the likelihood that we enact a carbon tax.
In the modern economy, the key to accelerating progress is to unlock the effort of the private sector.
To wrap up this entry, I think that modern applied climate research plays a key role in Herbert Simon’s research agenda. In his bounded rationality theory, decision makers often face binding constraints in solving problems they face. This means that their solutions can be inefficient. In the language of economics, they are not choosing to locate on the production possibility frontier. Economic research can point out these inefficiencies and nudge decision makers to reoptimize. This point is especially true when external conditions such as climate are changing over time.
Read my 2013 paper with Frank Wolak to see a specific example in the case of household electricity consumption. If enough private decision makers recognize that they face a challenge, then the demand for new solutions increases and this creates a profit incentive for firms to innovate. This expands our adaptation menu and helps society as a whole to cope with the new challenges we face.