A growing consensus indicates that climate change will impact economic well-being, and understanding the cost of this event is important to optimize climate policies. Over the past decade, an expanding body of literature estimated the impacts of climate change on significant facets of economic well-being; however, I have identified three shortcomings in the literature. First, previous studies predominantly focused on temperature and precipitation while ignoring other climatic variables, such as humidity and wind speed. Climate change is predicated on the shifts in a set of climatic variables, including temperature, precipitation, humidity, and wind speed; therefore, omitting any of these components may generate bias in the estimates. Second, although economists have examined various economic impacts caused by climate change, some topics have not been investigated thoroughly, and micro-mechanisms are lacking. Third, most of these studies largely focused on the U.S. context, whereas developing countries, especially China, have received little attention. The impacts of climate change may be particular strong on such countries given their increased vulnerability to this event, such as credit constraints and restricted access to irrigation. My dissertation aims to fill these research gaps.

The first chapter, coauthored with Junjie Zhang and Minpeng Chen, discusses the importance of climatic variables other than temperature and precipitation. Two models are estimated and compared using county-level agricultural data derived from China for the period of 1980 to 2010 to identify the possible omitted-variable bias. The restricted model includes temperature and precipitation only, whereas the full model includes a set of climatic variables that also contains humidity, wind speed, sunshine duration, and evaporation. The results show that omitting humidity tends to overpredict the cost of climate change on crop yields, while ignoring wind speed is likely to underpredict the effect.

The effect of temperature on economic growth needs to be understood to optimize climate policies, and much of the existing literature has estimated this relationship with aggregated economic data. Chapter 2 presents the micro-mechanism behind this relationship by employing detailed firm-level production data collected from the Chinese manufacturing sector for the period of 1998 to 2007. Upon estimating the effect of temperature on the four components in a Cobb-Douglas production function (output, total factor productivity (TFP), labor, and capital inputs), the reduction in TFP in response to high temperatures is determined to be the primary driver behind output losses. Given that TFP is invariant to the intensity of labor and capital inputs, I am able to estimate the net effect of temperature on productivity while separating any factor allocation effect.

Climate change remains as a major threat to food security, particularly for China because of its enormous population living off limited cropland. Evaluating the cost of climate change on agriculture requires estimates on both crop yields and cropland, where analysis on the latter has been limited. The third chapter, coauthored with Jianghao Wang and Junjie Zhang, utilizes unique high-resolution satellite data from 1980 to 2010 to estimate the effect of temperatures on cropland changes in China. We find that extremely high temperatures have significantly negative effects on the area of cropland, and the majority of the decrease in cropland is likely to be the conversion to built-up lands. As a result, climate change is likely to severely threaten the food security in China in the absence of countervailing investments. Ultimately, this dissertation aims to empirically evaluate the impact of climate change on the Chinese economy. This research is expected to contribute to a growing body of literature by improving on existing methodologies as well as by developing micro-mechanisms and discovering new concepts. Furthermore, this work has significant policy implications. As the world's largest CO2 emitter, China's climate strategy is critical to mitigating global climate change.