The Impact of Climate Change Risks on Residential Consumption in China: Evidence from ARMAX Modeling and Granger Causality Analysis

Abstract

Estimating the impact of climate change risks on residential consumption is one of the important elements of climate risk management, but there is too little research on it. This paper investigates the impact of climate change risks on residential consumption and the heterogeneous effects of different climate risk types in China by an ARMAX model and examines the Granger causality between them. Empirical results based on monthly data from January 2016 to January 2019 suggest a significant positive effect of climate change risks on residential consumption, but with a three-month lag period. If the climate risk index increases by 1 unit, residential consumption will increase by 1.29% after three months. Additionally, the impact of climate change risks on residential consumption in China mainly comes from drought, waterlogging by rain, and high temperature, whereas the impact of typhoons and cryogenic freezing is not significant. Finally, we confirmed the existence of Granger-causality running from climate change risks to residential consumption. Our findings establish the linkage between climate change risks and residential consumption and have some practical implications for the government in tackling climate change risks.