Adapting to Climate Change through Urbanization and Competition Within a System of Cities

1. Adapting to Climate Change through Urbanization and Competition Within a System of Cities Matthew E. Kahn UCLA and NBER and IZA Institute of the Environment Department of Economics Department of Public Policy Anderson School of Management UCLA Law School

2. Introduction • Over the next decades climate change will pose a set of serious "known unknowns" • The world is moving to cities • Different geographic areas will face different challenges • How will our urban quality of life be affected?   • Who bears the incidence of the “new news”?

3. Rising Global CO2 Emissions

4. The Per-Capita CO2 Challenge

6. I am Not Optimistic About an 80% Global GHG Reduction • Growing population • Growing per-capita income fueling vehicle growth and electricity growth and meat eating (deforestation and carbon sequestration) • Free riding by every government • The USA coal to natural gas transition is a good start but will it “bend” the curve? • A Democrat as USA President in 2016 leading a global “coalition of the willing”?

7. My Recent Political Economy Carbon Mitigation Work • Cragg et al. "Carbon geography: the political economy of congressional support for legislation intended to mitigate greenhouse gas production." Economic Inquiry 51.2 (2013): 1640-1650. • Glaeser, and Kahn. "The greenness of cities: carbon dioxide emissions and urban development." Journal of Urban Economics 67, no. 3 (2010): 404-418. • Holian and Kahn. Household Demand for Low Carbon Public Policies: Evidence from California. No. w19965. National Bureau of Economic Research, 2014. • Kahn and Kotchen. "Business cycle effects on concern about climate change: the chilling effect of recession." Climate Change Economics 2, no. 03 (2011): 257-273.

8. Talk Outline • Start in the USA --- over 80% of people live 300 major cities --- lessons for LDC cities • End in the developing world with a large agricultural sector and an active rural-to-urban migration trend • What have environmental and urban economics taught us about the microeconomics of adaptation? • What is the research agenda?

9. My 2010 Book (Basic Books)

10. The United States as a Coastal Nation but “Higher Ground” Exists

11. Dynamic Spatial Compensating Differentials Equilibrium • Locations as differentiated products • Shocks: local labor demand, natural disasters, amenity shifts  new evolving equilibrium • Low migration costs across cities • Spatial prices will adjust so that the marginal household and firm will be indifferent across locations

12. Rolling Stone Magazine June 2013 • Goodbye, Miami • By Jeff Goodell • “By century's end, rising sea levels will turn the nation's urban fantasyland into an American Atlantis. But long before the city is completely underwater, chaos will begin” • Coastal cities face greater risk and we have built up a capital stock in such locations. • Death vs. Capital Destruction and Depreciation

13. Miami = Atlantis?

14. Bunten and Kahn (2014) • Who is on the margin in at-risk cities? Who is infra-marginal? Heterogeneity matters • Rolling Stone: Miami is sinking! So why don’t today’s real estate prices reflect this expectation? • Examples of heterogeneity • Income • Self-protection • Endogenous networks

15. The Model • City i has an aiand faces climate shocks κi • Households have self-protection ability ρh and moving cost μh • Bid for house in city j by resident h of city i: • Marginal household h determines price

16. Implications • House prices in at-risk cities may seem inflated to outsiders due to sorting • Type of heterogeneity matters • if μi captures endogenous amenities, transition cost • if ai is destroyed, permanent welfare cost • Heterogeneity may change estimated incidence • Does marginal household reflect average?

17. Known Unknowns! • We know that different geographic areas will face different threats including; • temperature extremes • rainfall extremes • sea level rise • natural disaster frequency and severity • A series of spatially subscripted random variables • Climate Scientists step up and improve and refine their climate forecasts

18. Alex Hall’s Research: Where Should LA Increase Density?

19. The San Diego Foundation’s 2050 Study“A Regional Wake Up Call” • 4 degrees (F) hotter on average • Sea level will be 12-18 inches higher. • water demand up 37% while supply will down 20% • Wildfires will be more frequent and intense. • Public health will be at riskfrom heat and air pollution • Peak electricity consumption up 70%

20. Learning About New Risks and Investment • Information as a public good • Cities all over the world conduct similar impact evaluations (and consider worst case scenarios) • How do self interested households, Profit maximizing firms, Local governments, National government respond to these forecasts? • Ugly North Carolina Coast example

21. Two Adaptation Pathways Provided by Free Markets • Migration and City Competition • Innovation, Investment and experimentation

22. Quality of Life is the Modern City’s “Golden Goose” • Human capital as the engine of modern growth • In this footloose age, those cities with great quality of life will attract and retain the skilled. • The total value of buildings in Los Angeles County is $1.1 Trillion dollars!

23. Defending Against Quality of Life Threats • Los Angeles real estate near UCLA is priced at $1,000 a square foot. • This price premium is due to amenities not productivity! • If climate change poses a QOL threat, home owners and the Mayor who controls the local property tax revenue have strong incentives to play defense!

24. Escape from San Diego? If a city such as San Diego’s quality of life suffers due to climate change, home owners there suffer an asset loss Households there can migrate to a Detroit or another city whose quality of life is relatively better Migration breaks the link between urban places and urban people Land owners as an interest group pushing for adaptation policies

25. Moving to Higher Ground and Transition Dynamics • Both within and across cities • Time to Build?

26. Implications for Europe and LDCs • Low migration within the EU • Culture and language and past history as migration costs • Limits to international migration --- quite relevant for small nations with few cities (Alesina and Spolaore)

27. Urban Quality of Life, Comfort and Amenities • Day to day impacts on urban life • Albouy, David, Walter F. Graf, Ryan Kellogg, and Hendrik Wolff. Climate amenities, climate change, and American quality of life. No. w18925. National Bureau of Economic Research, 2013. • Kahn, Matthew E. "Urban growth and climate change." Annu. Rev. Resour. Econ. 1, no. 1 (2009): 333-350.

28. Becker Household Production Functions (HPF) • We desire comfort and safety • We produce these goods at home using a range of inputs such as market products, our time, where we choose to live, how we live • Climate change is an input in the comfort and safety HPFs • These are not structural functions! • Firm innovation lowers the price of achieving comfort, Singapore is hot and productive!

29. Becker Style Household Production Function and Climate Change Adaptation • Barreca, Alan, Karen Clay, Olivier Deschenes, Michael Greenstone, and Joseph S. Shapiro. Adapting to Climate Change: The Remarkable Decline in the US Temperature-Mortality Relationship over the 20th Century. No. w18692. NBER, 2013. • Quality of Life in Singapore today as a Preview of our urban future?

30. Some Evidence on Adapting to Heat

31. How Will Firms Respond to Anticipated Climate Change ? • One person’s misery = firm’s opportunity • Directed technological change (Acemoglu and Linn 2004 QJE) • Ideas are public goods, worldwide diffusion

32. Thom Mayne and Brad Pitt’s Floatable Homes

33. Acemoglu Meets Becker • Directed technological change lowers the price of adaptation friendly products • Raises the real income of the urban poor • Lowers the cost of adapting to climate change in both the developed and the developing world • Realism about extreme fat tail events

34. How Do We Protect the Urban Poor? • Implications of climate change for quality of life inequality (Piketty revisited?) • Matt Damon movie Elysium features the rich colonizing space after Earth is ravaged. • Zoning • Information • Tracking the CPI for adaptation friendly products ranging from air conditioning to smart phones to refrigeration to quality housing

35. Disaster Risk and Coastal Cities: Fat Tails

36. Impacts of Natural Disasters Mitigated by Economic Growth • Kahn (2005 RESTAT) “The Death Toll from Natural Disasters” • Richer nations suffer less death when disasters occur • Why? • In this Twitter age, such death risk will continue to fall

37. Durable but Finite Lived Capital • Example of Hurricane Sandy and New York • Wall Street was not destroyed by Hurricane Sandy --- lessons learned so that the next Sandy will cause much less damage • NYC will lose Wall Street if this statement is false (it will move to higher ground) • In this case, the US doesn’t suffer

38. Glaeser and Gyourko 2005 JPE; Durable Housing and Urban Decline

39. Federal Government Policy and Spatial Moral Hazard • Can government play “too much” coastal defense? • Moral Hazard, spatial subsidies and “tough love” • The case of Hurricane Sandy and New York City and FEMA • Kousky, Carolyn, Erzo FP Luttmer, and Richard J. Zeckhauser. "Private investment and government protection." Journal of Risk and Uncertainty 33, no. 1-2 (2006): 73-100.

40. The Rise of Big Data • Actuarial risk and pricing and competition in insurance markets • Sending accurate signals to “naïve” households (e.g. climate deniers) • Wildfire and other disaster risk differentiated insurance contracts to encourage precautions • Water and electricity pricing

41. Urbanization in the Developing World • Farmer profitability dynamics • Productivity impacts of climate change? (Dell, Olken and Jones vs. Heal) • How much does climate change accelerate rural to urban migration? • What is the menu of cities that farmers can move to? How many? (Alesina and Spolaore) • Linked to choices in developed countries • Defusing climate-based conflict (Burke, Miguel et. al) urbanization helps!

42. Economic Development as a Key Adaptation Strategy • Private Income  durables, electricity, higher quality housing • Public revenue  hospitals, infrastructure, zoning and regulation, investments in education

43. The LDC Urban Adaptation Research Agenda • For every developing nation; • How many cities to move to? • Specific challenges climate change will pose? • Incentives of urban leaders to “welcome” migrants though allowing housing supply and infrastructure expansion (Feler and Henderson) • The urban poor, the slums and the “great race”

44. The System of Cities in LDCs • In Vern Henderson’s data set • Bangladesh has 31 cities, India has 144 cities • Indonesia has 54 cities, Vietnam has 25 cities • Take Zipf’s law seriously; rank j*pop j = pop 1 • 90 million people in Vietnam today • Suppose that a 70% urbanization rate in 2040 and 110 million people => 77 million urbanites • If no new cities  biggest city has 18 million people (which one? We will see)

45. Urbanization and Fertility in Vietnam (Becker Revisited)

46. The Rise of China’s System of Cities as Implicit Quality of Life Insurance • China’s bullet trains and other cross-city travel infrastructure facilitate market integration and mitigate the cost of megacity growth • Zheng, Siqi, and Matthew E. Kahn. "China’s bullet trains facilitate market integration and mitigate the cost of megacity growth." Proceedings of the National Academy of Sciences 110, no. 14 (2013): E1248-E1253. • Lessons for other LDCs?

47. Greater Beijing Area commute time change between Beijing and some nearby cities (minute) located in “sweet spot” not located in “sweet spot”

48. The Future of Food Production in the Face of Climate Change? • Global trade in agriculture • Diversification and the spatial correlation structure of climate shocks • Inventories and Futures markets • Dried fruit as a parable • Costinot, Donaldson, and Smith. Evolving Comparative Advantage and the Impact of Climate Change in Agricultural Markets: Evidence from 1.7 Million Fields around the World. JPE forthcoming

49. The World is Urbanizing and Warming • The System of Cities as a menu; free choice • An urbanized world has the resources and the technologies to adapt to many of the scenarios posed by the “new normal” • Cities compete and facilitate Innovation and learning • Anticipated crisis  opportunity • Why would capitalism fail this time? (politics! and “behavioral” agents) • Weitzman and the Fat Tail

50. Investment under Uncertainty, Option Value and Our Future Urban Capital Stock • We need a capital stock that can take a punch and that is finite lived • Or a mobile stock that we can take with us to higher ground • We know that we now don’t know where to build but we know that we will know in the future