Abstract: We evaluate how anticipation and adaptation shape the aggregate and local costs of climate change. We develop a dynamic spatial model of the U.S. economy and its 3,143 counties that features costly forward-looking migration and capital investment decisions. Recent methodological advances that leverage the ‘Master Equation’ representation of the economy make the model tractable. We estimate the county-level impact of severe storms and heat waves over the 20th century on local income, population, and investment. The estimated impact of storms matches that of capital depreciation shocks in the model, while heat waves resemble combined amenity and productivity shocks. We then estimate migration and investment elasticities, as well as the structural damage functions, by matching these reduced-form results in our framework. Our findings show, first, that the impact of climate on capital depreciation magnifies the U.S. aggregate welfare costs of climate change twofold to nearly 5% in 2023 under a business-as-usual warming scenario. Second, anticipation of future climate damages amplifies climate-induced worker and investment mobility, as workers and capitalists foresee the slow build-up of climate change. Third, migration reduces substantially the spatial variance in the welfare impact of climate change. Although both anticipation and migration are important for local impacts, their effect on aggregate U.S. losses from climate change is small.

Abstract: A unilateral carbon tax trades off the distortionary costs of taxation and the future gains from slowing down global warming. Because the cost is local and immediate, whereas the benefit is global and delayed, this tradeoff tends to be unfavorable to unilateral carbon taxes. We show that this logic breaks down in a world with trade and migration where economic geography is shaped by agglomeration economies and congestion forces. Using a multisector dynamic spatial integrated assessment model (S-IAM), this paper predicts that a carbon tax introduced by the European Union (EU) and rebated locally can, if not too large, increase the size of Europe’s economy by concentrating economic activity in its high-productivity non-agricultural core and by incentivizing immigration to the EU. The resulting change in the spatial distribution of economic activity improves global efficiency and welfare. A unilateral carbon tax with local rebating introduced by the US generates similar global welfare gains. Other forms of rebating can dilute or revert this positive effect.

Replication Files

Abstract: We study local carbon policy to address the consequences of climate change. Standard analysis suggests that the social cost of carbon determines optimal carbon policy. We start by using the spatial integrated assessment model in Cruz and Rossi-Hansberg (2021) to measure the local social monetary cost of CO₂ emissions: the Local Social Cost of Carbon (LSCC). Although the largest welfare costs from global warming are concentrated in the warmest parts of the developing world, adjusting for the local marginal utility of income implies that the LSCC peaks in warm and high-income regions like the southern parts of the U.S. and Europe, as well as Australia. We then proceed to study the effect of the actual carbon reduction pledges in the Paris Agreement and the progress they can make in implementing the expressed goal of keeping global temperature increases below 2°C. We find that although the distribution of pledges is roughly in line with the LSCC, their magnitude is largely insufficient to achieve its goals. The required carbon taxes necessary to keep temperatures below 2°C over the current century are an order of magnitude higher and involve large implicit inter-temporal transfers. Increasing the elasticity of substitution across energy sources is important to reduce the carbon taxes necessary to achieve warming goals.

Replication Files

Abstract: In the U.S., cognitive non-routine (CNR) occupations are disproportionately and increasingly represented in large cities. To study the allocation of workers across cities, we propose a quantitative spatial equilibrium model with multiple industries employing CNR and non-CNR occupations. Productivity is city-industry-occupation specific and, as we estimate, partly determined by externalities that depend on local occupation shares and total employment. An optimal policy that benefits workers equally, incentivizes the formation of cognitive hubs in large cities. It also creates higher overall activity in small cities, greater industrial specialization in both the largest and smallest cities, and greater diversification in medium-sized cities.

Appendix

Replication Files

Abstract: Global warming is a worldwide and protracted phenomenon with heterogeneous local economic effects. We propose a dynamic economic assessment model of the world economy with high spatial resolution to assess its consequences. Our model features several forms of adaptation to local temperature changes, including costly trade and migration, local technological innovations, and local natality rates. We quantify the model at a 1° × 1° resolution and estimate damage functions that determine the impact of temperature changes on a region’s fundamental productivity and amenities conditional on local temperatures. Welfare losses from global warming are very heterogeneous across locations, with 20% losses in parts of Africa and Latin America but also gains in some northern latitudes. Overall, spatial inequality increases. Uncertainty about average welfare effects is significant, but much smaller for relative losses across space. Migration and innovation are shown to be important adaptation mechanisms. We use the model to study the impact of carbon taxes, abatement technologies, and clean energy subsidies. Carbon taxes delay consumption of fossil fuels and help flatten the temperature curve but are much more effective when an abatement technology is forthcoming.

Replication Files

Supplementary Materials

Abstract: This paper quantitatively assesses the world's changing economic geography and sectoral specialization due to global warming. It proposes a two-sector dynamic spatial growth model that incorporates the relation between economic activity, carbon emissions, and temperature. The model is taken to the data at the 1° by 1° resolution for the entire world. Over a 200-year horizon, rising temperatures consistent with emissions under Representative Concentration Pathway 8.5 push people and economic activity northwards to Siberia, Canada, and Scandinavia. Compared to a world without climate change, clusters of agricultural specialization shift from Central Africa, Brazil, and India's Ganges Valley, to Central Asia, parts of China and northern Canada. Equatorial latitudes that lose agriculture specialize more in non-agriculture but, due to their persistently low productivity, lose population. By the year 2200, predicted losses in real GDP and utility are 6% and 15%, respectively. Higher trade costs make adaptation through changes in sectoral specialization more costly, leading to less geographic concentration in agriculture and larger climate-induced migration.

Replication Files

Abstract: We study the desirability of industrial policies that generate sectoral hubs using a quantitative spatial model with cognitive non-routine and other occupations. The productivity of each occupation in an industry depends on sector-specific production externalities, which we estimate using a model-implied instrumental variable approach. We find that the optimal policy gives rise to national hubs in coastal cities in tradeable services, like Professional Services, and smaller regional hubs in less tradable services, like Health and Education. The optimal policy prescribes developing Manufacturing in smaller towns. We decompose the implied changes in local costs and the available varieties in each sector.

Replication Files

Abstract: We provide theory and evidence that the elasticity of local employment to a labor demand shock is heterogeneous depending on the commuting openness of the local labor market. We develop a quantitative general equilibrium model that incorporates spatial linkages in goods markets (trade) and factor markets (commuting and migration). We quantify this model to match the observed gravity equation relationships for trade and commuting. We find that empirically-observed reductions in commuting costs generate welfare gains of around 3.3 percent. We provide separate quasi-experimental evidence in support of the model’s predictions using the location decisions of million dollar plants.

Replication Files

Online Appendix

Abstract: We study the impact of intersectoral and interregional trade linkages in propagating disaggregated productivity changes to the rest of the economy. Using U.S. regional and industry data, we obtain the aggregate, regional and sectoral elasticities of measured total factor productivity, GDP, and employment to regional and sectoral productivity changes. We find that the elasticities vary significantly depending on the sectors and regions affected, and are importantly determined by the spatial structure of the economy. We use our calibrated model to perform a variety of counterfactual exercises including several specific studies of the aggregate and disaggregate effects of shocks to productivity and infrastructure. The specific episodes we study include the boom in California’s computer industry, the productivity boom in North Dakota associated with the shale oil boom, the disruptions in New York’s finance and real state industries during the 2008 crisis, as well as the effect of the destruction of infrastructure in Louisiana following hurricane Katrina.

Replication Files

Abstract: We develop a dynamic spatial growth theory with realistic geography. We characterize the model and its balanced-growth path and propose a methodology to analyze equilibria with different levels of migration frictions. Different migration scenarios change local market size, innovation incentives, and the evolution of technology. We bring the model to the data for the whole world economy at a 1° × 1° geographic resolution. We then use the model to quantify the gains from relaxing migration restrictions. Our results indicate that fully liberalizing migration would increase welfare about threefold and would significantly affect the evolution of particular regions of the world.

Videos of Simulations

Replication Files

Abstract: This paper studies the impact of spatial frictions on Asia’s long-term spatial development. Using the framework provided in Desmet, Nagy, and Rossi-Hansberg (2016), we analyze the evolution of Asia’s economy and the relative performance of specific regions and countries. We then perform a number of counterfactual experiments and find that a worldwide drop in transport costs of 40% increases the present discounted value of real income by 70.7% globally and 78% in Asia. These figures are much larger than those found in standard quantitative trade models because they include dynamic effects and take into account intracountry transport costs. We also perform exercises in which we upgrade Asia’s road network or relax migratory restrictions between locations in Asia. These exercises emphasize the important role of spatial frictions in the development of Asia’s economy.

Abstract: This paper studies the recent spatial development of India. Services, and to a lesser extent manufacturing, are increasingly concentrating in high-density clusters. This stands in contrast with the United States, where in the last decades services have tended to grow fastest in mediumdensity locations, such as Silicon Valley. India’s experience is not common to all fast-growing developing economies. The spatial growth pattern of China looks more similar to that in the United States than to that of India. Our findings suggest that certain frictions are keeping medium-density places in India from growing faster.

Abstract: We present a theory of spatial development. Manufacturing and services firms located in a continuous geographic area choose each period how much to innovate. firms trade subject to transport costs and technology diffuses spatially. We apply the model to study the evolution of the US economy in the last half-century and find that it can generate the reduction in the manufacturing employment share, the increased spatial concentration of services, the growth in service productivity starting in the mid-1990s, the rise in the dispersion of land rents in the same period, as well as several other spatial and temporal patterns.

Online Appendix

Replication Files

Abstract: The equilibrium relationship between trade and the spatial distribution of economic activity is fundamental to the analysis of national and regional trade patterns, as well as to the effect of trade frictions. We study this relationship using a trade model with a continuum of regions, transport costs, and agglomeration effects caused by production externalities. We analyze the equilibrium specialization and trade patterns for different levels of transport costs and externality parameters. Understanding trade via the distribution of economic activity in space naturally rationalizes the evidence on border effects and the "gravity equation".

Technical Appendix: Proofs of Propositions 1 and 2 and Matlab Program

Abstract: The paper studies the optimal distribution of business and residential land in a circular city. Once the optimum is characterized, we analyze the effect of changes in commuting costs and externality parameters. We also propose policies like labor subsidies, land taxes and zoning restrictions that can implement the efficient allocation as an equilibrium, or close the gap between the optimal and equilibrium allocations. The results show that business land is more concentrated at the center of the city in the optimum and that higher commuting costs increase the difference between optimal and equilibrium allocations.