Discussion Paper

Household Location Decisions and the Value of Climate Amenities

Jan 18, 2017 | Paramita Sinha, Martha L. Caulkins, Maureen L. Cropper

Summary

What people are willing to pay to experience warmer winters or avoid hotter summers is an important component of the benefits of CO2 mitigation policies and can be used to assess the welfare effects of temperature changes throughout the United States.

Key Findings

  • The value placed on warmer winters or cooler summers is revealed by household location decisions, which balance earnings opportunities and housing costs against local amenities, including summer and winter temperature, rainfall, snowfall, and humidity.
  • On average, households are willing to pay more to increase mean winter temperature and reduce mean summer temperature, but there is significant variation in willingness to pay. And, households sort geographically according to their tastes for climate.
  • Households in the Midwest region, on average, have lower marginal willingness to pay to increase winter and reduce summer temperatures than households in the Pacific and South Atlantic census divisions.
  • Taking sorting into account, aggregate willingness to pay to avoid the SRES B1 scenario in 2050 is about 1 percent of household income; it is about 2.4 percent of household income to avoid the more severe A2 SRES scenario.

Abstract

We value climate amenities by estimating a discrete location choice model for US households. The utility of each metropolitan statistical area (MSA) depends on location-specific amenities, earnings opportunities, housing costs, and the cost of moving to the MSA from the household head’s birthplace. We use the estimated trade-off among wages, housing costs, and climate amenities to value changes in mean winter and summer temperatures. We find that households sort among MSAs as a result of heterogeneous tastes for winter and summer temperatures. Preferences for winter and summer temperatures are negatively correlated: households that prefer milder winters, on average, prefer cooler summers, and households that prefer colder winters prefer warmer summers. Households in the Midwest region, on average, have lower marginal willingness to pay to increase winter and reduce summer temperatures than households in the Pacific and South Atlantic census divisions. We use our results to value changes in winter and summer temperatures for the period 2020 to 2050 under the B1 (climatefriendly) and A2 (more extreme) climate scenarios. On average, households are willing to pay 1 percent of income to avoid the B1 scenario and 2.4 percent of income to avoid the A2 scenario.