Temperature variability and long-run economic development

This study examines the effects of temperature variability on long-run economic development, which have not been fully considered in assessments of the costs of future climate change. To identify causal effects, a novel research design is employed, based on spatial first-differences. Economic activity is proxied by satellite data on nightlights. Drawing on climate science, the study distinguishes between day-to-day, seasonal, and interannual variability. The results indicate that day-to-day temperature variability has a statistically significant, negative effect on economic activity, while seasonal variability has a smaller but also negative effect. The effect of interannual variability is positive at low temperatures, but negative at high temperatures. The results also suggest that daily temperature levels have a non-linear effect on economic activity with an optimal temperature around 15 degrees Celsius, but most of the effects of variability seem to be due to larger uncertainty about future temperature realisations. The empirical effects can be found in both urban and rural areas, and they cannot be explained by the distribution of agriculture. The results indicate that temperature variability might add to the costs of anthropogenic climate change especially in relatively warm and currently relatively poor regions.