Climate and Happiness Katrin Rehdanz and David Maddison Hamburg University University of Southern Denmark

Introduction Climate is an important input to many household activities Affects heating and cooling requirements Determines clothing and nutritional needs Limits recreational activities Impacts of an enhanced greenhouse effect are many and diverse The effects of a changing climate might be positive or negative, depending on time and place Little is known about peoples preferences for a particular climate Can we determine the economic impacts of future climate change to households/individuals? Is climate a determinant of happiness?

Happiness and Temperature

Outline Why are we interested in peoples preferences? Different valuation methods Happiness research Happiness in economics Regression analysis

Why investigating preferences? Tackling the problem of future climate changes has major implications for policies of development and management is very costly Research work has generally focused on changes in productivity in sectors Little attention has been drawn to climate as an input to household activities To determine, if climate change is good or bad indicators are needed How can we measure the preferences for commodities not being traded on a market?

Environmental Valuation Methods Environmental goods are not traded on a market How can we estimate the price nonetheless? Indirect valuation looks at surrogate markets (complements, substitutes) e.g. hedonic pricing method, household production function approach Direct valuation Hypothetical market e.g. contingent valuation  Happiness research People are directly asked about their subjective well-being

Happiness Research Domain of psychologists Analysis of individuals evaluation of life circumstances and comparisons to other people past experience and expectation of the future How is happiness measured? Different type of questions „Taking all together, would you say you are: very happy fairly happy not happy at all.“ Decades of validation research

Happiness in Economics Uncommon in economics Objective position observable choices made by individuals preferences over goods and services Welfare ‚Satisfaction‘ with income More income enables individuals to satisfy more needs ... and more goods and services can be consumed Consequently ... economic growth is one of the major objectives of economic policy in any country

Income and Happiness Well-being Broader concept Satisfation with life as a whole (happiness) What is the relationship between income and happiness? Are persons with high income at a given point in time happier than those with low income? Are persons in rich countries happier than those in poor countries? Does an increase in income over time raise happiness?

Income and Happiness (2) On average richer people report higher subjective well-being Relationship seems to be nonlinear Income does buy happiness On average people living in rich countries are happier than those living in poor countries Happiness appears to be relatively stable and remaining flat with growing income

Sum up Standard economic theory rejects subjective experience as being ‚unscientific‘ ... but there are limits to which material goods and income create utility … and income can explain only a low proportion of differences in happiness So, what else determines differences in happiness?

Recent Research Influence of unemployment, inflation and recession Clark and Oswald (1994) Di Tella et al. (2001, forthcoming) Political and personal freedoms of a country Frey and Stutzer (2000) Environmental quality such as noise or air pollution Van Praag and Baarsma (2001) Welsch (2002)

Research on the amenity value of climate Hedonic approach Mainly applied to the US One of the few studies for Europe is Maddison and Bigano (2003) Household production function approach Cross-country comparisons possible Investigates changes in the consumption of related commodities Maddison (forthcoming)

Regression Analysis Regression analysis Model specification Investigates on the relationship between climate and happiness Estimates the magnitude of the effects of changes in climate Controlling for many other factors Model specification Which explanatory variables should be included? Which functional form is appropriate?

Variables Happiness data Economic variables Demographic variables Self-reported happiness for 67 countries for different years 185 observations, 4 item response category Economic variables GDP per capita in 1995 USD Annual growth in GDP Shortfall in income Annual inflation rate Annual rate of unemployment Demographic variables Life expectancy Literacy rate Population density Proportion of population above 65 years Proportion of population below 15 years

Variables (2) Cultural differences Political and civil rights Religion Climate variables in various indices Temperature, precipitation Annually averaged means Extremes Number of months with a particular climate

Model specification Climate variables Modification Functional form Minimum and maximum Annual averages and its squares Number of hot, cold, dry and wet months Modification Sampling weights Functional form Linear Semi-log, logistic

Results (Model 1)

Results (2) Climate variables explain part of the differences in self reported levels of happiness People seem to be concerned about very low temperatures very high temperatures very little rain (model 2) What is the impact of climate change? Calculate the change in GDP per capita necessary to hold happiness at its current level

Climate Change Predicted changes in climate for 2 time slices (2010-2039 and 2040-2069) Temperature changes Most warming during winter months and in high latitudes Very warm summers will become more frequent Very cold winters will become very rare Changes in precipitation Great uncertainty Geographic differences in rainfall are becoming more pronounced Increased precipitation in high latitudes More seasonal: drier summers and wetter winters in high latitudes

Impact of Climate Change (2040)

Impact of Climate Change (2040 and 2070)

Some Examples

Conclusions Income does buy happiness … but can explain only a low proportion of differences in happiness Among other variables climate is one determinant of happiness We can use this information to calculate the impact of climate change Our results support findings that High latitude countries might benefit from modest global warming Low latitude countries would suffer losses

Conclusions Number of limitations: Climate and climate change differ not only between countries, but also within Other climate variables Other consequences of climate change Indirect effects like extreme weather events Time it takes people to adapt