CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN The Amenity Value of the Italian Climate David Maddison and Andrea Bigano

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Presentation’s Plan l Introduction l Hedonic Literature and Climate l Data l Empirical Analysis l Results l Conclusions

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: Valuing Climate l Climate Change is currently a hot and much debated global issue. l There is disagreement about ‘When’, ‘Where’ and ‘How’ Climate Change will affect us. This paper is a contribution to the ‘How’ part of the issue. l In particular, possessing a money metric measure of the impact of changes in climate, may prove especially useful given the question about whether the costs of preventing climate change are justified by the benefits.

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: Climate and its Value l in the House Market: n Costs and Benefits associated with particular climates are capitalised into property prices: we are prepared to pay more for living in a nice area. l in the Labour Market: n Costs and Benefits associated with particular climates are collaterised into wages: we ask compensation for working in unpleasant conditions. Climate is an important localised imput to many households activities. It influences health conditions, heating and cooling requirements, nutritional needs, leisure activities. Households are attracted to regions offering preferred combinations of local amenities, hence:

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: Hedonic Models n Housing Market Owner of house i ’s problem: l Labour and Housing Market Where the house price is First order conditions then imply Where the individual’ endowment is now First order conditions then imply

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: Hedonic Literature and Climate l If individuals are freely able to select from differentiated localities then the tendency will be for the costs and benefits associated with disamenities to become capitalised into house prices and wage rates. l Across different regions there must exist both compensating wage and house price differentials and the value of marginal changes can be discerned from hedonic house and wage price regressions. l Assumptions of the thoretical model: n existence of equilibrium in the hedonic markets, n perfect information, n absence of relocation costs, n existence of smoothly continuous trade-off possibilities among all characteristics (internal solutions), n existence of a unified market for land and labour.

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: Why Italy? l This is the first study of this kind outside the U.S.A.; l Economic, climatic, house and labour market data are availiable at a good level of disaggregation; l Italy’s geographic characteristics lead to a marked variation in climate within a rather limited area. This allows us to use current day analogues for future climate changes, presuming that long run cost- minimising adaptation has already occurred.

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Introduction: The Climatic Regions of Italy Source: Cantù (Landsberg ed.) ( ) Alpine Italy 2. Po Valley 3. Northern Adriatic 4. Southern Adriatic 5. Liguria 6. Tyrrenian Coast 7.Calabria and Sicily 8. Sardinia

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Hedonic Literature and the Amenity Value of Climate

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Data Sources l Istituto Nazionale Previdenza Sociale provided Provincial data on expected labour income per worker; l Banca d’Italia provided Provincial data on national averaged after tax labour income and nationally averaged annual housing costs ; l A survey of provincial property prices per square meter is taken from Il Sole 24 Ore, a leading financial newspaper in Italy. l The climate data is taken from Leemans and Cramer. This database merges records drawn from a variety of published sources to create a terrestrial grid at the 0.5° level of resolution.

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Empirical Analysis: Variables’ Creation I l Our dependent variable (D.V.) is defined as « expected after tax labor income net of housing cost ». D.V. Expected Provincial after-tax Labour income Provincial housing costs for a dwelling of constant dimensions - Provincial Unemployment rate Labour income per worker National after tax Household Income Nationally averaged Housing Costs Provincial property prices /m 2

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Empirical Analysis: Variables’ Creation II Temperatures are adjusted so that they correspond to the average elevation of each province (-0.6° C/100m); Dummy variables were included: Years Coast Proximity Alpine Italy Macro-Regions Major Cities. Turin

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Variables included in the dataset 1

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Variables included in the dataset 2

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Empirical Analysis: Regression l Sample: Panel ( 95 provincial observations x 5 years). l Functional form: n Non-binary variables are entered as both linear and quadratic variables (centered to avoid multicollinearity); n Linear, semilog and inverse specification were tested (Maddala). The linear model was the most likely to have generated the data; l Standard errors were corrected to account for likely intra- provincial correlation and are robust to heteroskedasticity; l Population density, likely to be endogenous, tourned out to be exogenous and was not instrumented; l 2 alternative models were tested ( with or without longitude and latitude)

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Regression Results

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN The welfare impact of marginal changes in climate Note: Euro / household / year. T-statistics are in parentheses

CENTER FOR ECONOMIC STUDIES KATHOLIEKE UNIVERSITEIT LEUVEN Conclusions l There is considerable empirical support for the hypothesis that information on the amenity value of climate is contained in the market for housing and labour in Italy; l It appears that Italians regard the high July temperatures that they experience as a disamenity and similarly for high levels of precipitation in January. Insofar as future climate change is predicted to result in an increase in both, it threatens to bring a considerable reduction in amenity values to Italian households. l Qualifications: n Relevant climate variables not included; n Some arbitrariety in the choice of explanatory variables; n Results are very sensitive to geographical features n Non-marginal changes still to be identified.