Matthew Kahn - World Congress of Environmental and Resource

Adapting to Climate Change
through Urbanization and
Competition Within a System of
Matthew E. Kahn
Institute of the Environment
Department of Economics
Department of Public Policy
Anderson School of Management
UCLA Law School
• Over the next decades climate change will
pose a set of serious "known unknowns"
• The world is moving to cities
• Different geographic areas will face different
• How will our urban quality of life be
• Who bears the incidence of the “new news”?
Rising Global CO2 Emissions
The Per-Capita CO2 Challenge
Time Trends in Per-Capita Carbon Dioxide Emissions
I am Not Optimistic About an 80%
Global GHG Reduction
1. Growing population
2. Growing per-capita income fueling vehicle
growth and electricity growth and meat eating
(deforestation and carbon sequestration)
3. Free riding by every government
• The USA coal to natural gas transition is a
good start but will it “bend” the curve?
• A Democrat as USA President in 2016 leading
a global “coalition of the willing”?
My Recent Political Economy
Carbon Mitigation Work
• Cragg et al. "Carbon geography: the political economy of
congressional support for legislation intended to mitigate
greenhouse gas production." Economic Inquiry 51.2 (2013):
• Glaeser, and Kahn. "The greenness of cities: carbon dioxide
emissions and urban development." Journal of Urban
Economics 67, no. 3 (2010): 404-418.
• Holian and Kahn. Household Demand for Low Carbon Public
Policies: Evidence from California. No. w19965. National
Bureau of Economic Research, 2014.
• Kahn and Kotchen. "Business cycle effects on concern about
climate change: the chilling effect of recession." Climate
Change Economics 2, no. 03 (2011): 257-273.
Talk Outline
• Start in the USA --- over 80% of people live
300 major cities --- lessons for LDC cities
• End in the developing world with a large
agricultural sector and an active rural-to-urban
migration trend
• What have environmental and urban
economics taught us about the
microeconomics of adaptation?
• What is the research agenda?
My 2010 Book (Basic Books)
The United States as a Coastal Nation but
“Higher Ground” Exists
Dynamic Spatial Compensating
Differentials Equilibrium
• Locations as differentiated products
• Shocks: local labor demand, natural disasters,
amenity shifts  new evolving equilibrium
• Low migration costs across cities
• Spatial prices will adjust so that the marginal
household and firm will be indifferent across
Rolling Stone Magazine June 2013
• Goodbye, Miami
• By Jeff Goodell
• “By century's end, rising sea levels will turn
the nation's urban fantasyland into an
American Atlantis. But long before the city is
completely underwater, chaos will begin”
• Coastal cities face greater risk and we have
built up a capital stock in such locations.
• Death vs. Capital Destruction and Depreciation
Miami = Atlantis?
Bunten and Kahn (2014)
• Who is on the margin in at-risk cities? Who is
infra-marginal? Heterogeneity matters
• Rolling Stone: Miami is sinking! So why don’t
today’s real estate prices reflect this
• Examples of heterogeneity
1. Income
2. Self-protection
3. Endogenous networks
The Model
• City i has an ai and faces climate shocks κi
• Households have self-protection ability ρh and
moving cost μh
• Bid for house in city j by resident h of city i:
pij = pi + (aj - ai )- (1- rh)(E[k j ]- E[k i])- mh
• Marginal household h determines price
• House prices in at-risk cities may seem
inflated to outsiders due to sorting
• Type of heterogeneity matters
– if μi captures endogenous amenities, transition cost
– if ai is destroyed, permanent welfare cost
• Heterogeneity may change estimated incidence
– Does marginal household reflect average?
Known Unknowns!
• We know that different geographic areas will
face different threats including;
temperature extremes
rainfall extremes
sea level rise
natural disaster frequency and severity
• A series of spatially subscripted random
• Climate Scientists step up and improve and
refine their climate forecasts
Alex Hall’s Research: Where
Should LA Increase Density?
The San Diego Foundation’s 2050
“A Regional Wake Up Call”
• 4 degrees (F) hotter on average
• Sea level will be 12-18 inches higher.
• water demand up 37% while supply will down
• Wildfires will be more frequent and intense.
• Public health will be at risk from heat and air
• Peak electricity consumption up 70%
Learning About New Risks and
• Information as a public good
• Cities all over the world conduct similar
impact evaluations (and consider worst case
• How do self interested households, Profit
maximizing firms, Local governments,
National government respond to these
• Ugly North Carolina Coast example
Two Adaptation Pathways
Provided by Free Markets
• Migration and City Competition
• Innovation, Investment and experimentation
Quality of Life is the Modern
City’s “Golden Goose”
• Human capital as the engine of modern growth
• In this footloose age, those cities with great
quality of life will attract and retain the skilled.
• The total value of buildings in Los Angeles
County is $1.1 Trillion dollars!
Defending Against Quality of Life
• Los Angeles real estate near UCLA is priced at
$1,000 a square foot.
• This price premium is due to amenities not
• If climate change poses a QOL threat, home
owners and the Mayor who controls the local
property tax revenue have strong incentives to
play defense!
Escape from San Diego?
• If a city such as San Diego’s quality of life
suffers due to climate change, home owners
there suffer an asset loss
• Households there can migrate to a Detroit or
another city whose quality of life is relatively
• Migration breaks the link between urban
places and urban people
• Land owners as an interest group pushing for
adaptation policies
Moving to Higher Ground and
Transition Dynamics
• Both within and across cities
• Time to Build?
Las Vegas Metro Area
Implications for Europe and LDCs
• Low migration within the EU
• Culture and language and past history as
migration costs
• Limits to international migration --- quite
relevant for small nations with few cities
(Alesina and Spolaore)
Urban Quality of Life, Comfort and
• Day to day impacts on urban life
• Albouy, David, Walter F. Graf, Ryan Kellogg,
and Hendrik Wolff. Climate amenities, climate
change, and American quality of life. No.
w18925. National Bureau of Economic
Research, 2013.
• Kahn, Matthew E. "Urban growth and climate
change." Annu. Rev. Resour. Econ. 1, no. 1
(2009): 333-350.
Becker Household Production
Functions (HPF)
• We desire comfort and safety
• We produce these goods at home using a range
of inputs such as market products, our time,
where we choose to live, how we live
• Climate change is an input in the comfort and
safety HPFs
• These are not structural functions!
• Firm innovation lowers the price of achieving
comfort, Singapore is hot and productive!
Becker Style Household Production
Function and Climate Change
• Barreca, Alan, Karen Clay, Olivier Deschenes,
Michael Greenstone, and Joseph S.
Shapiro. Adapting to Climate Change: The
Remarkable Decline in the US TemperatureMortality Relationship over the 20th Century.
No. w18692. NBER, 2013.
• Quality of Life in Singapore today as a
Preview of our urban future?
Some Evidence on Adapting to
How Will Firms Respond to
Anticipated Climate Change ?
• One person’s misery = firm’s opportunity
• Directed technological change (Acemoglu and
Linn 2004 QJE)
• Ideas are public goods, worldwide diffusion
Thom Mayne and Brad Pitt’s
Floatable Homes
Acemoglu Meets Becker
• Directed technological change lowers the price
of adaptation friendly products
• Raises the real income of the urban poor
• Lowers the cost of adapting to climate change
in both the developed and the developing
• Realism about extreme fat tail events
How Do We Protect the Urban
• Implications of climate change for quality of
life inequality (Piketty revisited?)
• Matt Damon movie Elysium features the rich
colonizing space after Earth is ravaged.
• Zoning
• Information
• Tracking the CPI for adaptation friendly
products ranging from air conditioning to
smart phones to refrigeration to quality
Disaster Risk and Coastal Cities:
Fat Tails
Impacts of Natural Disasters
Mitigated by Economic Growth
• Kahn (2005 RESTAT) “The Death Toll from
Natural Disasters”
• Richer nations suffer less death when disasters
• Why?
• In this Twitter age, such death risk will
continue to fall
Durable but Finite Lived Capital
• Example of Hurricane Sandy and New York
– Wall Street was not destroyed by Hurricane Sandy
--- lessons learned so that the next Sandy will
cause much less damage
– NYC will lose Wall Street if this statement is false
(it will move to higher ground)
• In this case, the US doesn’t suffer
Glaeser and Gyourko 2005 JPE;
Durable Housing and Urban Decline
Federal Government Policy and
Spatial Moral Hazard
• Can government play “too much” coastal
• Moral Hazard, spatial subsidies and “tough
• The case of Hurricane Sandy and New York
City and FEMA
• Kousky, Carolyn, Erzo FP Luttmer, and
Richard J. Zeckhauser. "Private investment
and government protection." Journal of Risk
and Uncertainty 33, no. 1-2 (2006): 73-100.
The Rise of Big Data
• Actuarial risk and pricing and competition in
insurance markets
• Sending accurate signals to “naïve”
households (e.g. climate deniers)
• Wildfire and other disaster risk 
differentiated insurance contracts to encourage
• Water and electricity pricing
Urbanization in the Developing World
1. Farmer profitability dynamics
2. Productivity impacts of climate change?
(Dell, Olken and Jones vs. Heal)
3. How much does climate change accelerate
rural to urban migration?
4. What is the menu of cities that farmers can
move to? How many? (Alesina and Spolaore)
– Linked to choices in developed countries
5. Defusing climate-based conflict (Burke,
Miguel et. al) urbanization helps!
Economic Development as a Key
Adaptation Strategy
• Private Income  durables, electricity, higher
quality housing
• Public revenue  hospitals, infrastructure,
zoning and regulation, investments in
The LDC Urban Adaptation
Research Agenda
For every developing nation;
How many cities to move to?
Specific challenges climate change will pose?
Incentives of urban leaders to “welcome”
migrants though allowing housing supply and
infrastructure expansion (Feler and Henderson)
• The urban poor, the slums and the “great race”
The System of Cities in LDCs
In Vern Henderson’s data set
Bangladesh has 31 cities, India has 144 cities
Indonesia has 54 cities, Vietnam has 25 cities
Take Zipf’s law seriously; rank j*pop j = pop 1
90 million people in Vietnam today
Suppose that a 70% urbanization rate in 2040
and 110 million people => 77 million urbanites
• If no new cities  biggest city has 18 million
people (which one? We will see)
Urbanization and Fertility in
Vietnam (Becker Revisited)
The Rise of China’s System of Cities
as Implicit Quality of Life Insurance
• China’s bullet trains and other cross-city travel
infrastructure facilitate market integration and
mitigate the cost of megacity growth
• Zheng, Siqi, and Matthew E. Kahn. "China’s
bullet trains facilitate market integration and
mitigate the cost of megacity
growth." Proceedings of the National Academy of
Sciences 110, no. 14 (2013): E1248-E1253.
• Lessons for other LDCs?
Greater Beijing Area
commute time change
between Beijing and
some nearby cities (minute)
located in “sweet spot”
not located in “sweet spot”
The Future of Food Production in
the Face of Climate Change?
• Global trade in agriculture
• Diversification and the spatial correlation
structure of climate shocks
• Inventories and Futures markets
• Dried fruit as a parable
• Costinot, Donaldson, and Smith. Evolving
Comparative Advantage and the Impact of
Climate Change in Agricultural Markets:
Evidence from 1.7 Million Fields around the
World. JPE forthcoming
The World is Urbanizing and Warming
• The System of Cities as a menu; free choice
• An urbanized world has the resources and the
technologies to adapt to many of the scenarios
posed by the “new normal”
• Cities compete and facilitate Innovation and
• Anticipated crisis  opportunity
• Why would capitalism fail this time? (politics!
and “behavioral” agents)
• Weitzman and the Fat Tail
Investment under Uncertainty,
Option Value and Our Future
Urban Capital Stock
• We need a capital stock that can take a punch
and that is finite lived
• Or a mobile stock that we can take with us to
higher ground
• We know that we now don’t know where to
build but we know that we will know in the
The Research Agenda
• For every city and system of cities, new
estimates of adaptation responses by
households, firms and governments
• Attenuation of damage from natural disasters
and heat waves?
• Continued life expectancy and QOL progress?
• DSGE analysis such as;
• Desmet, Klaus, and Esteban RossiHansberg. On the spatial economic impact of
global warming. NBER# w18546. , 2012.

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