Don�t Worry, Be Happy: The Welfare Cost of Climate Variability � A Subjective Well-Being Approach

Using a household panel data set in rural Ethiopia combined with a new data set containing daily atmospheric parameters, we are able to show that increased climate variability reduces the level of a farmer�s subjective assessment of their individual well-being. Resulting from the impact that climate variability has on uncertainty about future income, those living in riskier areas report lower life satisfaction than those living in more stable environments. The magnitude of our result indicates that a one standard deviation increase in climate variability has an equivalent e?ect on life satisfaction to a two standard deviation (1-2%) decrease in real consumption expenditure per capita. Out of all of the determinants examined, this e?ect is shown to be one of the largest determinants of life satisfaction in rural Ethiopia. Robustness tests demonstrate the resilience of our results and help to disentangle the e?ects of climate variability from weather e?ects. They also help to draw out the mechanism by which climate variability impacts life satisfaction. We also demonstrate, using a second panel data set in urban Ethiopia, that increased climate variability has no impact on subjective well-being for urban households. In light of the resilience and magnitude of our result, policies that reduce dependence on rain-fed agriculture, improve farmers� ability to deal with climatic risk, and provide credible insurance are likely to be welfare-enhancing.