Essays on the Economics of Climate Change

In my dissertation, I study the economics of climate change. The first chapter starts from the observation that climate change and extreme weather events are a global problem but especially affect poor countries. The effect on agriculture is well studied, but we know less about non-agricultural firms. I combine firm-level data from sub-Saharan Africa and South Asia with high-resolution weather data to study how non-agricultural firms in poor countries react to weather shocks. I show that weather shocks reduce firms' labor productivity, and that firms react by scaling back complementary expenditures on items like rented machinery, rented space and sales personnel. This makes firms even less productive. To assess policy implications, I develop a structural model including this mechanism. I combine it with machine learning estimates of the impact of climate change to discipline climate change counterfactuals. Counterfactuals show that these firm reactions make (i) policies benefiting mostly larger firms and (ii) policies improving firm adaptation to climate change especially effective at countering welfare losses from climate change. The second chapter notes that it is well established that climate change affects economic production, but its effects on trade costs have not been studied. I use international trade and weather data covering almost 200 years to show that climate change increases trade costs. Estimating a simple augmented gravity framework, I find that rising temperatures at the origin or destination country increase bilateral trade cost. I use a standard trade model to quantify the welfare impact of increased trade cost, finding that the impact of climate change on trade cost over the preceding 100 years reduced welfare in the 2010s by 0.72 percent. Welfare gains depend not only on countries' own climate trends, but also on their trends relative to neighboring countries - when countries see less drastic climate change than their neighbors, they see relative trade cost gains. Looking at the distribution of gains, poor and rich countries are equally harmed by trade cost increases due to climate change. Smaller economies, which are more reliant on international trade, are especially affected. A counterfactual exercise shows that ignoring this channel leads to a 28 percent underestimate of the welfare impact of climate change. Because it is based on a gravity estimation, my methodology can easily be embedded in studies of the impact of climate change. The third chapter starts from the basic fact that distance matters for trade: Countries trade more with other countries which are physically close to them. Countries which are closer together also tend to have more correlated weather patterns. I show that, as a result, countries trade more with other countries which have more correlated weather patterns. This means trade cost reductions directly decrease volatility in the context of climate change, creating a novel channel for gains from trade. Distance reduces trade more or less for different sectors, however. This means that a country's sectoral composition determines how exposed it is to correlated weather patterns - countries specializing in sectors for which distance matters more face more correlated weather shocks and trends across their trade network. This creates a novel channel for sectoral composition to affect aggregate volatility. I show this can create a mismatch between the welfare-maximizing and profit-maximizing sectoral composition, because risk averse consumers dislike volatility, but risk neutral firms ignore it.