Klaus Desmet, Esteban Rossi-Hansberg
We propose a dynamic spatial theory to analyze the geographic impact of climate change. Agricultural and manufacturing firms locate on a hemisphere. Trade is costly, firms innovate, and technology diffuses over space. Emissions from energy used in production contribute to the atmospheric stock of carbon, which increases temperature. Warming differs across latitudes and its effect on productivity varies across sectors. We calibrate the model to analyze how climate change affects the spatial distribution of economic activity, trade, migration, growth, and welfare. We assess quantitatively the impact of migration and trade restrictions, energy taxes, and innovation subsidies.