Association for Public Policy Analysis & Management

We propose a novel methodology to estimate adaptation to climate change. Our unifying approach simultaneously exploit weather variation to identify the impact of weather shocks, and climatic variation to identify the effect of longer-run observed changes. We then compare the short- and long-run effects to provide a magnitude of adaptive responses by economic agents.

We apply our methodology to study the impact of climate change on air quality, and estimate the so-called climate penalty on ozone. Ground-level or "bad" ozone is not emitted directly into the air, but is created by chemical reactions between oxides of nitrogen (NOx) and volatile organic compounds (VOC) in the presence of sunlight and warm temperatures. Hence, climate change may increase ozone concentration in the near future. This climate penalty on ozone means that climate change might offset some of the improvements in air quality expected from reductions in emissions of ozone precursors, and therefore some of the improvements in public health.

We have three main findings. First, a changing climate appears to be affecting ground-level ozone concentrations in two ways. A shock in temperature of one degree Celsius increases ozone levels by 1.7 ppb on average. A change of similar magnitude in a 30-year moving average increases ozone concentration by 1.2 ppb. Therefore, by omitting climate normals, the standard fixed-effect approach would underestimate the impact of climate change on ambient ozone concentrations by over 40 percent. The total impact is rather 2.9 ppb, within the range of the climate penalty on ozone found by simulation modeling studies. Furthermore, ozone levels seem to be more sensitive to temperature shocks than to changes in lagged climate normals, which are functions of the weather realized in the past 30 years. Agents may find it difficult to adjust to shocks, but could potentially respond to information available years in advance.

Second, we find evidence of adaptive behavior. For a change of one degree Celsius in temperature, our measure of adaptation in terms of ozone concentration is 0.45 ppb. Relative to twice as much the effect of temperature shocks, which would be the case if economic agents did not adjust at all to changes in longer-run temperature trends, the adaptive response represents 13 percent. When we compare our estimate of adaptation to the direct effect of the CAAA “nonattainment” designations, it is equivalent to over one third of that effect.

Third, adaptation in counties with levels of ozone below the EPA’s standards appears to be smaller than adaptation in counties in “nonattainment”. Since counties complying with EPA’s ozone standards are not under stringent CAAA regulations, the first is our measure of “natural” adaptation. Counties out of attainment, however, must reduce ozone concentration by making costly adjustments in their production processes. Thus, the second is our measure of regulation-induced adaptation, and it is almost 70 percent larger than the market-based adaptation, and is equivalent to about 45 percent of the direct effect of the CAAA “nonattainment” designations.