In our paper with Daigee Shaw (Mendelsohn et al., 1994), henceforth MNS, we developed a new approach to measuring the impact of global warming on agriculture. We call this approach because it relies upon standard rent theory as a way of identifying the impact of changes on net economic welfare. We compared the Ricardian approach with the traditional production-function approach, which uses agricultural production functions but has great difficulty identifying all the other adjustments that farmers make in response to changing external conditions. The Ricardian approach is particularly well-suited to a tremendously heterogeneous sector because it can rely upon reduced-form estimation and does not require the impossible task of constructing structural models of hundreds of crops in thousands of locations. Estimating the model using cross-sectional data on climate, farm-land prices, and other economic and geophysical data for almost 3,000 counties in the United States, the Ricardian approach shows a significantly lower estimated impact of global warming than the traditional productionfunction approach. Indeed, our preferred statistical approach showed modest benefits of climate change. In his comment on MNS in this issue of the Review, William R. Cline (1996) raises three concerns. First, he notes that the analysis assumes that output prices remain constant. Second, he asserts that the analysis assumes that the supply of water for irrigation is perfectly elastic. Third, he calls for testing the results of the model on alternative climate scenarios from general circulation models (GCM's). His first and third points are useful additions, while the second is incorrect. Our Ricardian approach assumes that the existing pattern of agricultural land rents and land prices reflects the long-run equilibrium economic effect of climate and other geophysical and economic variables. Standard economic reasoning shows that, by calculating the estimated effects of perturbing the climatic variables, we can project the impact of climate change on economic welfare. We do so in a partial-equilibrium approach which assumes that output prices are invariant to the climate, and Cline is correct to point out that this might lead to biased estimates because the partialequilibrium estimates tend to underestimate damages and overestimate benefits. In fact, the bias is small given standard parameters for agricultural demand and supply functions. We illustrate this point using linear supply and demand functions for agricultural crops. Let demand be given by Qd = ao - a1P while supply is Q. = Po + PI P, where Q and P are output and price and ai and [,i are parameters. In equilibrium at the old climate, market outcomes are Qo and PO. Now suppose that global warming contracts supply so that

Fraas and Lutter raise two important points in their comment on Muller and Mendelsohn (2009): How to design policies for sources that yield negative marginal damages? How does statistical uncertainty in the marginal damages affect the trading ratios across emitters? We address both issues in this response. JEL: H53, Q53, Q58

This paper argues for efficient environmental regulations that equate the marginal damage of pollution to marginal abatement costs across space. The paper estimates the source-specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading program for power plants more efficient. The savings from using trading ratios based on marginal damages are between $310 and $940 million per year. The potential savings from setting aggregate emissions efficiently and from including more sources of air pollution are many times higher.

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

This paper uses a quantitative dynamic ecosystem vegetation model to explore the potential impact of warming up to 9-12 degrees C on global ecosystems. The paper does not find evidence of a global collapse in terrestrial ecosystems but there is evidence of substantial changes. Temperate and tropical forests expand and replace boreal forests and forests shift to woodlands and parkland at high temperatures. Net primary productivity and standing forest biomass per hectare rise. These changes will affect dependent animal species. Further research is needed to measure the resulting benefits and damages to market and nonmarket services.