Valuing Climate Amenities In Brazil Using A Hedonic Pricing Framework

Abstract

In this dissertation, I measure the amenity value of climate in Brazil. The value is useful for the measurement of one consequence of greenhouse gas emissions, climate change. A basic hedonic framework shows that "good" climate is of value to workers and consumers of housing. Workers accept lower wages and pay greater housing rents (all else equal) to work and live in a city with better climate. To measure the impact of reducing emissions, I estimate the variations in wage and rents attributable to cross-sectional differences in climate.

Studies typically evaluate the effect of variations in climate on housing prices or income. They do not account for the effect of climate on firms' costs, however. If climate affects production, then the value of a marginal change in the climate amenity is the difference between the effects on housing price and wages. In Chapter 2, I describe this result from the Roback model (1982).

Empirical results from hedonic studies suggest that there is still no consensus on the impact of climate change. One potential cause of the discord is the correlation between climate and amenities omitted from models. Estimates suffer from bias due to data limitations and incomplete information on preferences. A second cause is the correlation of amenities included in the model. Consequences of multicollinearity are implausible and imprecise parameter estimates. The severity of the impact of multicollinearity will depend on the model and dataset. In Chapters 5 and 6, I perform sensitivity analyses on the rent and wage models and show the unreliability of climate parameter estimates.

Hedonic studies also ignore the potential correlation between unobservables in the rent and wage equations. By contrast, I estimate the equations as a system of seemingly unrelated regression equations. In Chapter 7, I compare the results from the single-equation and system methods. I find that the values of climate amenities obtained from the single-equation method are larger in magnitude. The overestimation of amenity values has implications for evaluating the benefits of an improvement in environmental quality.