Article ID Journal Published Year Pages File Type
5050669 Ecological Economics 2011 8 Pages PDF
Abstract

The contemporaneous relationship between temperature and income is important because it enables economists to estimate the economic impact of global warming without assuming a structural model. Until recently, empirical evidence generally suggests that there is a negative relationship between temperature and income, and, therefore, global warming has an adverse impact on economic activity. However, Nordhaus (2006) argues that the temperature-income relationship depends on how income is measured. We show in this paper that the results of Nordhaus (2006) may be due to an omitted-variable problem. Based on a well-motivated temperature-income model, we find that the relationship between temperature and income is not dependent on income measurement. Our regression results show that the adverse impact of an increase of 1 °C in temperature can be as much as a 3% decrease in total income for the G-7 nations. Therefore, our results suggest an aggressive climate mitigation policy.

Research Highlights► Income declines with global warming no matter how it is measured. ► The anomalous results of Nordhaus (2006) may be due to the omitted-variable problem. ► Global warming of 1 °C can reduce the total income of the G-7 nations by 3%.

Related Topics
Life Sciences Agricultural and Biological Sciences Ecology, Evolution, Behavior and Systematics
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