Department of Agricultural and Resource Economics EEP101University of California at Berkeley David ZilbermanSpring, 1999THE ECONOMICS OF CLIMATE CHANGEQuestions• What are the impacts of climate change? 2. How should they be addressed? 3. How will the magnitude and timing of climate change be affected?(1) Studies on Economic Impacts of Climate Change On agriculture• Results of economic studies depend on scientific knowledge.Scientific uncertainties => economic impact uncertainties. • There are several lines of modeling. They differ in:-Incorporation of uncertainty-Incorporation of variability and spatial heterogeneity.Modeling Approacha. Hedonic Price Models (Mendelsohn, AER).Premise:• Impacts of climate change will be reflected in asset values. • Current asset prices can be used to estimate the price sensitivity ofland values to changes in climate parameters. • Various assumptions about changes in climate conditions are used toestimate impacts of climate change on land values.2b. Programming Simulations (Adams, McCarl)Premise:• Agronomic estimates of impact on climate change on yields and costat different locations under various conditions are used to estimatechanges in land use choices at various locations. • Optimal output supplies and input demands are computed using theland-use estimates. • Equilibrium prices, output levels, and profits for different regionsare then derived. • Assumptions about international trade price supports vary amongstudies.c. Stochastic Simulations (Segerson-Riley)• Consider impacts of estimated changes in means and variabilityindicators (e.g., impacts of climate change on average temperatureand distribution of seasonal and daily temperatures) on yields andprofitability at various locations.d. Regional Case Studies (Doering)• Interdisciplinary--combine quantitative estimates with expertinterviews to assess response to changes.Lessons:• Without considerations of variability, overall impacts of climatechange are not overwhelming (a 5 to 15 percent increase or decreasein agricultural income and profitability of agriculture).3• Distributional impacts may be much more significant than overalleffects.• Production patterns will shift 100-200 miles northward. • Impacts in the middle of regions will be smaller than in theperiphery. • The livestock sector is more likely to lose, while crops may gain. • Water resources will become more valuable. • Uncertainty about climate change will slow investment in vulnerableregions and enhance value of projects that will dampen the impact ofclimate change. • The value of climate monitoring and predicting technologies as wellas value of water-saving technology increases. • Possible increases in seasonal and daily variation in weather maylead to significant income losses. • Snowmelt will increase flood risks and worsen seasonal supply ofwater. • Relocation and adjustment costs may be significant. • The cost of adjustment depends on speed of change. Gradualchanges can be handled easily; brisk changes are a source of concern.Limitations of Current Research• Underemphasis of research on global agricultural impacts of globalclimate change. How will climate change affect trade and LDCs?4• The interrelation between climate change and population growthshas not been studied. The combined effects are especially worrisome.For example, water problems are a source of concern regardless ofclimate change. • Shortages and crises lead to technological and institutionalinnovations. These cannot be foreseen, and they may lead tooverestimation of some costs.(2) How Climate Change Impacts Should Be Addressed• Major impacts:-Rising sea level-DesertificationThere are understudied issues with many “thorny” problems, e.g.,institutional and policy solutions to flooding and related problems.Response to climate change will include: • Changes in investment and capital formation policies. • Investments that reduce negative impact of climate change should beencouraged. • Investments that enhance negative impacts should be curtailed. • Emphasis on increased R&D to develop resource-conservingtechnologies and improved monitoring technologies. • Emphasis on adaptive management. • Emphasis on policies aimed to delay climate change.• No regret policies.5(3) Policies to Delay and Dampen Climate ChangePremise:(a) Individuals and firms respond to incentives.-Shortages lead to innovation of resource-conservingtechnologies.-Shortages lead to adoption of such technologies.- Shortages lead to institutional innovations.Examples:(1) California droughts-Adoption of modern irrigation technologies-Introduction of water banks(2) Energy crisis of 1970 leads to-Improved fuel efficiency-Smaller cars(b) Three types of pollution control incentives:-Taxes-Subsidies-Transferable permits• Producers overwhelmingly object to taxes.• Subsidies may be misused.• Transferable permits are most acceptable politically.They require:-Establishing aggregate targets.6-Pollution reduction.-Verifiable products to be traded.• Initial allocation is a major issue.• There is conflict between developing and developed countries.Obstacles to Kyoto Agreement and Water Trading• Developing countries (LDCs) foresee growth in their own emissionand view curtailment of emissions as barriers on growth. • Developing countries may be more concerned with the present(higher discount rate) than the future and take higher future climaterisks. • LDCs will refuse to cooperate early as part of a bargaining strategy.They want their effort to be subsidized.• Implementation of trading in carbon sequestration rights is difficult.1. Monitoring of emissions is a major measurement problem. Proxiesare needed. 2. Proxies are not accurate. Relationships between practices and CO2emissions or sequestration's in random vary across locations. 3. Determination of proxies is linked to other policy problems:-Political pressure to support agriculture.-Other environmental policy issues (waste management).-Transition to “landscape” incentives.4. Technological change and new knowledge may suggest frequentreassessment of proxies and their value.5. What about controlling methane and other substances?7Conclusion• Global change is a threat that needs to be monitored and
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