Climate Change as an Agricultural Economics Research Topic

Climate Change as an Agricultural Economics Research Topic Abstract Climate change is not just a topic for the future—it is already producing real consequences. Economically, the issue has three principal dimensions: impacts, that is, how vulnerable are we; adaptation, that is, what can we do to reduce the impacts by altering operations; and mitigation, that is, what can we do to reduce the drivers causing climate change and thus the long-term extent of climate change? All of these issues have economic dimensions, including appraising damages and the value of effects reducing actions, as well as the formulation of efficient policies. Thus, it is not surprising that this is both an active agricultural economic research area and one with many more research possibilities. We review the impacts, adaptation, and mitigation literature, identifying issues, summarizing main findings, commenting on methods, and pointing out research needs, with a special focus on what agricultural/applied economists have to offer. Climate Change (CC) is not solely a concern for the future. It is a concern for today. Relative to recorded global history: (a) the last three years have successively been the warmest in recorded history; (b) each of the five warmest years ever seen have occurred since 2010; (c) 16 of the 17 warmest years have occurred since 2000; and (d) it has been 40 years since the global annual temperature was below the twentieth century’s average (National Oceanic and Atmospheric Administration [NOAA 2017]). Additionally, according to the Intergovernmental Panel on Climate Change (IPCC 2014c), rainfall is changing in distribution and intensity, extreme events are increasing in severity and frequency, and many other changes are arising. As CC evolves, further changes are projected, with temperatures increasing by 2–4 °C by 2100, and by 1 °C over the next 25 years (see IPCC 2014c for discussion). Agricultural yields, costs, pests, and infrastructure needs are all being affected (IPCC 2014a). Historically, farming has evolved to adapt to local climates but those climates are shifting, and as CC proceeds, adaptations will require altered practices. Indeed, farmers are already adapting by adjusting planting dates, varieties planted, crop mix, and livestock populations, and agricultural economists are currently assessing the extent and value of such adaptation actions. Climate change is being driven in large part by the accumulation of greenhouse gas (GHG) concentrations in the atmosphere. Atmospheric carbon dioxide (CO2) concentration is up from an 1850 level of 275 parts per million (ppm) to over 406 ppm today, and considering all GHG heat forcing effects, this is equivalent to over 485 ppm (IPCC 2014c). Mitigation actions are being undertaken to reduce emissions, and agriculture is one of the larger emitting sectors. Globally, agricultural emissions make up an estimated 25% share of total emissions, and arise from cropping, livestock, and land use change (IPCC 2014b). Many have suggested that agricultural management can be altered as part of an overall effort to decrease GHGs, again raising economic issues of cost, best practices to follow, impact, and incentive design. Climate change is an active agricultural economic research area contributing to the economic endeavors discussed above, as well as numerous others. Here, we will review the existing body of work covering the three major aspects of the issue: agricultural impacts of climate change; adaptation to these impacts; and policies aimed at mitigating future climate change by limiting drivers. We attempt to describe the state of the art in each aspect and identify possible research directions. In so doing we will identify issues, summarize main findings, comment on methods, and point out research needs. One caveat is in order—the vast amount of literature does not allow us to be comprehensive, so we will only reference exemplary pieces, literature reviews, and recent novel papers. Impacts of Climate Change on Agriculture Climate change alters productivity, production costs, resource availability, market prices, welfare, poverty, and food security. In order to estimate economic impacts, economists generally need measures of potential CC impacts on physical productivity and input usage. These impacts have been estimated using either econometrics or process-based simulation models. Generally, the econometric approaches let us infer the future from the past by examining the impacts that climate has had across time and space. The simulation approaches can be less data-intensive, but embody strong assumptions about climate/production performance inter-relationships and model accuracy. Impact studies have examined implications for crops, livestock, land, water, labor, infrastructure, factor productivity, and environmental quality. Broadly, impacts are negative under extreme heat or cold, with lesser impacts in between and a general inverted-U shape, plus impacts can be positive in cold areas. Specific findings by broad agricultural attribute follow. Crop Yield Studies There are many econometric studies of climate impacts on crops. Across this body of literature, evidence has been found of the following: (a) non-stationary crop yield distributions, with mean and variance being strongly affected by changes in temperature and precipitation (McCarl, Villavicencio, and Wu 2008); (b) alterations in higher-order moments of yield distributions (Tack, Harri, and Coble 2012); (c) temperature thresholds for crops, above which additional heat becomes damaging (potentially severely) as temperature continues to rise (Schlenker and Roberts 2009); (d) mixed signs and magnitudes of yield impacts across locations, with low latitude areas tending to have negative impacts (McCarl, Villavicencio, and Wu 2008); and (e) substantial CO2 sensitivity of C3 crop yields plus impacts on C4 yields when drought occurs (Attavanich and McCarl 2014). Crop yield impacts have also been widely estimated via simulation (e.g., see the Reilly et al. 2002 review). Findings are: (a) there are spatially varying impacts; (b) inclusion or omission of CO2 impacts cause disparate results (Reilly et al. 2002); (c) econometric and simulation estimates converge when key factors (like CO2) are controlled (Lobell and Asseng 2017); (d) performance in tropical areas has been poor as models are generally developed in temperate locations (Hertel and Lobell 2014), although recent improvements have been made. Climate change also impacts yield through influence on extremes (IPCC 2014a). Studies have examined impacts of shifts in severity and/or frequency of: (a) El Nino – Southern Oscillation events (Chen, McCarl, and Adams 2001); (b) hurricanes (Chen and McCarl 2009); (c) hot days (Lobell et al. 2013); (d) intra-annual temperature variability, rainfall intensity, and drought frequency (Attavanich and McCarl 2014); and (e) wildfires as they impact rangelands and forests (Pausas and Keeley 2014). Climate change also has indirect crop production impacts including: (a) pesticide cost increases (Chen and McCarl 2001) and (b) ozone damages which (Lobell and Asseng 2017) argue are likely to be quite large. More generally factor productivity and rates of yield growth will be impacted (Villavicencio et al. 2013; Attavanich and McCarl 2014) Livestock Studies Livestock will be affected by CC, although studies are sparser on this topic, and widely available simulation models do not exist. Experiments and observations have shown that CC affects rates of gain, milk production, mortality, feed intake, illness, disease and parasites, conception rates, feed supplies, carrying capacities, and grass nutrition (Mader 2014). Key and Sneeringer's (2014) econometric analysis found modest reductions in milk yields under CC, with the largest declines in the south, while Yu (2014) found that temperature increases result in reduced fed cattle sale weights, particularly in the south. Additionally, Mu, McCarl, and Wein (2013) found that CC likely contributes to the spread of avian influenza. Land Value and Use Studies Mendelsohn, Nordhaus, and Shaw (1994) used a hedonic approach—dubbed the “Ricardian” approach—to examine CC influences on U.S. land rental rates finding CC increases rents. There have been many applications of the Ricardian approach, along with debates over weaknesses and extensions (see the review in Chatzopoulos and Lippert 2016). Certainly, the approach does not factor in market-price adjustments or CO2 impacts. Additionally (Schlenker, Hanemann, and Fisher 2007) find that: (a) land value models suffer from misspecification problems with respect to irrigation; (b) shifts in water availability have a negative impact on irrigated land rents; and (c) more hot days have a negative impact on rents, except in northern latitudes. Climate change will also affect land use—perhaps most dramatically through the loss of land to rising seas—particularly in low-lying cropped areas (Chen, McCarl, and Chang (2012)). Salt-water intrusion associated with sea level rise is also a threat. A less dramatic but ongoing effect involves shifts in crop mix and land use arising due to CC impacts on productivity (Attavanich et al. 2013). Nelson et al. (2009) find that CC may induce reductions in the global land area suitable for crops, while Mu, McCarl, and Wein (2013) find that CC causes shifts between cropping and grazing and Cho and McCarl (2017) find that CC induces crop mix shifts. Water Climate change will alter precipitation patterns and thus also alter surface water supplies and ground water recharge (IPCC 2014c). An emerging consensus seems to be that dry areas will become drier, which would be problematic for farming in many parts of the world (Kumar et al. 2015). This will alter urban and agricultural water demands; Chen, Gillig, and McCarl (2001) estimate that CC impact would cause a 3% increase in urban water demand in San Antonio, Texas. Agricultural irrigation demands would also change with increases in hotter areas (Reilly et al. 2002). The potential for overcoming CC water effects via irrigation expansion is location-specific. In the western United States (Elias et al. 2016) assert that irrigation expansion is unlikely. However, there is potential for expanded irrigation in the eastern United States (Gollehon and Quinby 2007), which has already been increasing in recent decades. Labor Supply and Health In much of the world, farming is labor intensive -- often under hot conditions. Kjellstrom et al. (2009) estimate that, under a hot scenario, 2080’s labor work capacity will fall by 11% to 27% in Southeast Asia, Andean and Central America, and the Caribbean. Farmers in wealthier regions can avoid this exposure by using air-conditioned equipment. Health is also climate-change sensitive, and a number of impacts are directly relevant for agriculture, including effects on food demand and nutrition, as well as rural labor supply. We will not deal with the topic here, but rather refer the reader to the reviews in Patz et al. (2014) and the health chapter of IPCC (2014a). Infrastructure Shifts in the amount of food being produced, its location, and the loss of coastal areas to sea level rise also have implications for agricultural infrastructure. Antle and Capalbo (2010) discuss the potential impact of shifting production patterns on locations of storage, shipping facilities, and rail infrastructure (as analyzed in Attavanich et al. 2013). Sea level rise will also affect port capacity. Additionally changing patterns of agricultural product flows will have implications for needed rural roads and bridges. These shifts in production patterns will also alter infrastructure demands more broadly, for example, creating new geographic needs for input supply and processing facilities (as observed for salmon by Hermansen and Heen 2012). Environmental Quality Climate change can also have significant effects on environmental quality. Shifts can occur in ecosystems and their services (IPCC 2014a), pest populations, and in turn pesticide runoff (Shakhramanyan, Schneider, and McCarl 2013), soil erosion (Segura et al. 2014), and biodiversity (Bellard et al. 2012). Khanna, Swinton, and Messer (2018) provide coverage of approaches to such issues in a companion paper in this issue. Markets, Prices, Welfare, Food Security, and Poverty Most of the literature has equated CC with rising prices and diminished food security (IPCC 2014a). Given the relatively price-inelastic nature of food demand, the market consequences of CC can be large (Reilly et al. 2002). However, rising prices can benefit farmers, and the price rise can be sufficient to offset the adverse impacts but consumers uniformly lose (Butt et al. 2005). Hertel and Rosch (2010) discuss CC effects on labor markets, noting that, in some cases, CC can cause farmers to hire more labor, thereby spreading beneficial impacts across the rural economy. Hertel, Burke, and Lobell (2010) found that in 2030 CC increased prices and reduced rural poverty rates in about half the countries they studied. Indirect evidence can also be drawn from developments during the 2007–2012 commodity crisis, where in many countries, higher prices contributed to reductions in rural poverty (Headey 2014). On the other hand, urban poor are likely to be hurt (Ahmed, Diffenbaugh, and Hertel 2009). This underscores the importance of considering food demand curves in CC analyses, as well as the rural/urban distribution of poverty. Agricultural Economic Research Directions on Impacts A number of impact areas merit additional research. There is a broad need for research on heat-tolerant crops and those beyond grains and oilseeds. From an economic perspective, including heat-tolerant crops in models can reduce the consequences of CC. Indeed, contrasting the results of Adams et al. (1990) and (Reilly et al. 2002) shows that including cotton, sorghum, and tomatoes dramatically reduced net damages. Furthermore, some heat-tolerant crops are regionally predominant and their omission biases impact estimates. Finally, the overwhelming emphasis on grains and oilseeds to date overlooks the fact that many other crops are important around the world, and an understanding of their CC sensitivity is needed to estimate regional and global CC consequences. Climate change research is also needed on economic impacts and the extent of the following: increased ozone; altered livestock performance and mortality; expanded ranges of pests, parasites, and diseases; altered extreme event frequency; altered water supplies; changes in non-agricultural water demand; rates of aquifer depletion; changes in grass growth and forage nutritional content; changes in environmental quality; impacts on total factor productivity as almost all research to date has focused on CC impacts on yields; and consequences of the total array of CC impacts for food prices and security. The role of elevated atmospheric CO2 in stimulating crop growth and the resulting damages from CC also merits more attention. For example, a recent special issue of Agricultural Economics on CC impacts (Nelson et al. 2014) completely ignored CO2, concluding that CC would have a dramatic impact on food prices by mid-century. However, other studies have shown CO2 consideration greatly lowers damage estimates (Reilly et al. 2002). This issue cannot be simply waved away due to uncertainty in impacts. Finally, while we have emphasized CC impact on agriculture, agricultural and applied economists have the right skill-set to make important contributions in the measurement of impacts across the entire economy (Carleton and Hsiang 2016). Adaptation Climate change impacts cause producers to alter their operations to reduce adverse impacts or exploit opportunities. This is referred to as “adaptation” in the literature. Agriculture has always adapted to the local climate, but today we face an unprecedented rate of change that increases the required adaptation effort. Furthermore, adaptation is a necessary endeavor given the future projected temperature path in the next 25 years wherein roughly 1 degree of temperature increase is virtually assured. Adaptation studies involve observing what has happened, examining new strategies that might be employed, and evaluating their economic implications. Economic Studies on Adaptation The EPA (2013) indicates that “The average length of the growing season in the contiguous 48 states has increased by nearly two weeks since the beginning of the 20th century.” This has been accompanied by earlier planting times. Changing crop mix and shifts out of cropping to grazing are other forms of adaptation. Cho and McCarl (2017) find that temperature increases were associated with several U.S. crops moving north and west, as well as to higher elevations. Mu, McCarl, and Wein (2013) show a movement of land from cropping to pasture/range when temperatures and precipitation pass thresholds. Employing irrigation, better managing water, using water-conserving practices, and building infrastructure are also observed crop adaptations (Howden et al. 2007), as is an increase in pesticide use (Chen and McCarl 2001). On a broader scale, adaptation can involve shifts in patterns of international trade for exploiting the climate-influenced comparative advantage of different regions (Baldos and Hertel 2015).1 1 For more discussion of international trade, see the companion paper in this issue by Martin (2018). Livestock systems also exhibit adaptation. Actions may involve land use change, operation size shifts, species or breed alterations, stocking rate changes, and rangeland-related alterations. Seo and Mendelsohn (2008) found that African livestock species mixes shift with temperatures, with higher temperatures favoring small ruminants. Zhang, Hagerman, and McCarl (2013) found that in Texas, more heat-tolerant cattle breeds (Brahman) were selected under hotter conditions, and Angus breeds were selected under cooler conditions. Briske et al. (2015) review evidence on rangelands, and show adaptations in the form of adjusted stocking rate, altered season of grazing, and changes in pest management. Gaughan et al. (2009) identified livestock adaptations in the form of the following: adjustments in feeding including altered forages; provision of shade, misting and water; and relocation to different regions. Howden et al. (2007) found that more integrated crop and livestock production systems arise under CC. An additional source of adaptation involves changes in institutions governing the natural resources that are influenced by climate change, such as water. Anderson and Hill (2004) indicate that the dry conditions in the western United States led to the use of prior-appropriation water rights as opposed to the English riparian system in the wetter eastern United States. Others have found that water scarcity has led to water trading markets (see discussion in Colby 1988). Similarly, a major drought stimulated California to pass a law that required sustainability plans for groundwater basins facing overdraft (California Department of Water Resources 2016). Adaptation invariably incurs costs, and these must be weighed against the prospective benefits that arise from limiting damages or exploiting opportunities. Howden et al. (2007) found that adaptation actions involved with shifts in crop mixes, livestock species, or livestock breeds decease the realized costs of drought and heat waves. Butt, McCarl, and Kergna (2006) found that altering crop mixes and adopting drought-resistant varieties increases welfare while decreasing countrywide risk of hunger. Aisabokhae, McCarl, and Zhang (2011) find that adaptations in crop-planting dates and time to maturity were the most valuable among a number they studied. Yu and Babcock (2010) find that crop variety shifts increase yields under increased drought frequency, altered pest populations, and heat increases. Mendelsohn and Dinar (1999) compare econometric results with those from crop growth simulations and conclude that the potential damages from CC could be reduced by up to 50% through adaptation. Chen, McCarl, and Chang (2012) find that increases in the rate of technical progress rates can offset CC impacts on yields and sea level-induced land loss. Butt, McCarl, and Kergna (2006) find that adaptation generally worsens producer surplus and increases consumer surplus. Additionally, the public cost of supporting agricultural adaptation through fixed capital formation, infrastructure development, research and development, extension, and transitional assistance has been estimated at about 14 billion USD/year (IPCC 2014a). One missing piece from many adaptation studies is the cost of actually carrying out the adaptation with many costs like research and development on new varieties and practices, information dissemination, changes over in equipment, infrastructure modification, and many others being largely unexplored. McCarl (2007) provides crude estimates of the cost of various adaptation components, and shows them to be large. Such costs are typically neglected in models allowing adaptation. For more on this, see the discussion in Antle and Capalbo (2010). Commonly, models treat the alteration in crop mixes and the emergence of new varieties as costless. Other Dimensions of Adaptation Adaptation can be performed by natural ecosystems as well as humans. Natural adaptations result from ecosystem reactions to a changed climate (e.g., altered bird migrations, mixes of vegetation, or pest ranges). Human adaptations have been categorized as being either autonomous or planned (IPCC 2014a). In an economic setting, these are better defined as private and public adaptations. Economically autonomous adaptations are those undertaken by private entities acting in their own best interests. Planned, or more accurately, public adaptations refer to those undertaken by government addressing market failures and public goods which would be underinvested in private markets such as seawalls, information provision, forms of plant breeding, and dam construction (McCarl, Thayer, and Jones 2016). Public actions in support of private adaptations also arise to correct information failures and resource limits, as will be discussed below. Of course there are important limits to human adaptation, including the following: knowledge, awareness, and technological state; physical and biological characteristics, economic and financial resource availability, human capital; social and cultural barriers; and governance and institutions (IPCC 2014a). Economic considerations pose another set of barriers. These include transaction costs, information costs, the public goods nature of some adaptations, and missing markets. Finally, individual attitudes can limit adaptation. Some individuals simply do not believe in climate change, or they may find adaptations to be in conflict with other practices and cultural norms. It is also important to consider the possibility that adaptation to the current climate is incomplete. Burton and May (2004) term this an adaptation deficit. For example, a region facing a future with more flooding may not be well-adapted to current flooding. Furthermore, adaptation will not overcome all climate impacts, leaving residual damages. Species extinction is a form of damage that is practically irreversible. The existence of such adaptation deficits and residual damages is economically rational if the cost of eliminating them exceeds the cost of the ensuing damages—although the latter may be difficult to quantify. Another dimension of adaptation is termed maladaptation, which describes a situation where actions by one party worsen the adaptation status of others (Barnett and O’Neill 2010). This involves adaptation actions that increase vulnerability for: the adapting party now (via poor implementation); the adapter in the future (e.g., through excessive current use of scarce resources); parties elsewhere (e.g., employing adaptation via water reuse lowers water availability to downstream parties); and other parties in the future (increasing pumping now and depleting an aquifer). From a strictly economic standpoint, maladaptation actions can be rational if gains to the adapter are large enough to compensate those who face increased vulnerability. However, such compensation is rarely paid, leaving the vulnerable segment of the population worse off. As noted above, one research direction involves examining behavior to see what types of adaptations have occurred. There are two major issues in this regard. First, one must realize that not all possible adaptations will be observable in that observed practices are influenced by the range of prices that have occurred and the technology available. For example, within the United States, labor and capital prices have favored capital relative to labor, thereby reducing observations of labor-using adaptations. Additionally, when climate change alters production it may induce new technologies and permit previously unobserved adaptation possibilities. Second, some items identified as adaptations may not really be so. Lobell (2014) argues that many proposed CC “adaptations” do not become more beneficial as CC evolves, and are adaptation illusions not substantially lessening vulnerability or exploiting opportunities. The meta-analysis by Moore et al. (2017) confirms this conjecture, revealing that virtually all adaptation benefits in the studies assembled by the IPCC under AR5 (Challinor et al. 2014) do not yield benefits that depend on changes in temperature or precipitation. This is not to say that such investments are bad ideas—they simply do not diminish the impacts of CC. Agricultural Economic Research Needs and Directions on Adaptation Many adaptation-related economic research possibilities exist. First, it is important to continue work on identifying possible adaptations, examining the prevalence and nature of observed adaptations, plus the costs and benefits of adaptations as CC evolves. Research is also needed on the appropriate levels of public investment in adaptation, along with identifying investments that will be privately implemented without the need for public assistance. For example, how much should the public invest in education today, or development of drought-tolerant varieties, or constructing water storage? Such work needs to consider uncertainties, lag times, and irreversibility. Another research direction involves developing criteria and scoring rules that can be used in adaptation project evaluation. The UNFCCC Paris Climate Accord established a multi-billion dollar annual fund for the support of adaptation and mitigation activities. In allocating those funds, potential investments will need to be evaluated, ranked, and ultimately selected or denied for funding. McCarl, Thayer, and Jones (2016) indicate that evaluations will need to confront issues such as additionality, permanence, uncertainty, and the potential for maladaptation. Finally, work is needed on estimating associated transactions and implementation costs, and building them into models that simulate choices among adaptation possibilities. Mitigation Mitigation refers to actions to lessen future CC by reducing the underlying drivers. In an agricultural context, this mainly involves actions to reduce net GHG emissions. Agriculture, forestry, and other land use represent an important emissions source, with an estimated 24% share globally (IPCC 2014b). Production-related CO2 emissions are modest, but these sectors emit a major share of non-CO2 GHGs and release large volumes of CO2 when forested lands are converted to agriculture (Gibbs et al. 2010). McCarl and Schneider (2000) divided agricultural mitigation possibilities into three categories. First, agriculture can reduce direct emissions through alterations in manure management, livestock feeding, fossil fuel use, nitrogen fertilizer use, and rice cultivation, among other actions. Second, agriculture can increase carbon sequestration by employing less-intensive tillage, avoiding deforestation, avoiding conversion of grasslands into cropping use, and reverting croplands to grass or trees. Third, agriculture could produce commodities that substitute for emission-intensive products such as bioenergy or wood in place of concrete and steel in construction (see Smith et al. 2008 for detailed lists). Appraising the Impacts and Potential for Agricultural Mitigation Actions Many studies have examined economic aspects of GHG mitigation efforts. At the sector level, Murray et al. (2005) find in the United States that: (a) agricultural emission reductions, sequestration enhancements, and bioenergy offsets can mitigate GHGs at relatively low “carbon” prices (really prices for CO2 equivalent amounts); (b) the sector is capable of meeting the U.S. level of net emission reductions that would have been required to comply with the Kyoto Protocol; (c) there is an upward-sloping aggregate supply curve of mitigation potential where there are different optimal strategies to employ depending on carbon price; (d) agricultural soil carbon sequestration is competitive and dominant at low prices for about 20 years, but the amount falls at higher prices due to saturation and land competition from other mitigation possibilities; (e) marginal abatement supply curves for individual strategies are generally misleading because they ignore inter-strategy resource competition (land moving into bioenergy precludes using the land for afforestation, improvements in fertilization practices and less intensive tillage); (f) at low carbon prices, activities complementary with current production dominate (i.e., alterations in tillage and forest management), while at higher prices strategies that substitute for conventional crop production take over (i.e., biomass-fueled electricity and afforestation); and (g) mitigation competes with food production, decreasing production, and exports while increasing food prices, with an increasing impact as carbon prices rise. Studies have also investigated the importance of time when considering sequestration since continued sequestration eventually results in saturation of the soils and forests. Lee et al. (2007) find that sequestration initially increases but then stabilizes or falls (agricultural soil accumulation ceases within about 25 years, while forest accumulation continues for 50 years but then declines due to forest product harvest). In contrast, cumulative GHG reductions from most other agricultural mitigation strategies continue to grow over time. Agricultural mitigation has been found to be an important asset in comprehensive mitigation efforts. Rogelj et al. (2015) show that ignoring or restricting the scope of mitigation activity substantially increases the costs of meeting CC goals like limiting temperature increase. Fawcett and Sands (2006) come to similar conclusions when including or omitting non-CO2 GHG emission reduction. This body of literature has identified a number of imperfections and challenges for the implementation of mitigation actions. The first of these is an issue with permanence, which arises in the context of carbon sequestration where carbon is typically sequestered in a volatile form. For example, carbon sequestered in trees will be released if fires or forest harvest occur. Further, sequestration in soils will be lost if substantial soil disturbance occurs. Importantly, permanence is often cited as a reason for omitting sequestration from lists of eligible strategies (Dutschke 2001). Additionally, observed prices for sequestration projects (specifically afforestation or forest management) have been much lower under the Clean Development Mechanism (CDM) trading than those for other opportunities, in part reflecting permanence (Conte and Kotchen 2010). Another permanence concern involves possible costs of maintaining sequestration after the rate of accumulation has effectively fallen to zero. This may mean that further incentives are needed to retain the carbon. For example, if one pays a landowner for afforestation, then in the long run carbon accumulation stops—as might payments—but one may need to incentivize the landowner to retain the sequestration. Some have suggested that permanence be addressed by leasing sequestered carbon rather than selling it (Marland, Fruit, and Sedjo 2001). Kim, McCarl, and Murray (2008) investigate how permanence issues affect a buyer’s willingness to pay for sequestration projects with permanence risks. Examining plausible cases, these authors find that price discounts could be much greater than 50%, thereby supporting the finding of lower prices for sequestration under the CDM, and the reluctance to include sequestration in trading schemes. Kim, McCarl, and Murray also argue that a grading standard may be needed to render the mitigation alternatives fungible. Another challenge to mitigation action is posed by leakage that occurs when mitigation projects reduce commodities entering the market place and, in response to higher prices, producers elsewhere replace the lost production. Murray, McCarl, and Lee (2004) develop a leakage-based price discount formula considering the following: market share of the displaced commodity; elasticity of supply outside of the project area; total market demand elasticity; and ratio of emissions when producing the commodity inside and outside a target area. Exploring leakage possibilities for forestry and agriculture cases shows some price discounts exceeding 50%. Additionally, these authors argue that small projects that displace small market shares will have large amounts of leakage, contradicting the widely-held belief that small projects lead to no leakage. The also indicate that leakage can only be eliminated through global coverage. The indirect land use issue that has arisen in the bioenergy arena as reviewed in Hertel and Tyner (2013) is also a form of leakage. In addition, the extent of GHG reduction due to the execution of a mitigation project is in many cases uncertain. Kim and McCarl (2009) assert that this will lead to lower prices relative to strategies with known impacts, and thus derive a formula for a price discount. These authors also examine the uncertainty-narrowing aspects of spreading mitigation activity over space and time. Rose et al. (2014) discuss sources of uncertainty in international trading which arises due to conditions in the country where the project is implemented, international program rules, as well as project performance and the risk of transaction cancellation. Another challenge facing those seeking to implement agricultural mitigation policies stems from the difficulty of assessing a project’s additionality. Cases have arisen where mitigation payments could be made for existing practices or those that would have occurred in the absence of the payment. Such practices do not contribute to mitigation and are not “additional” (Murray, Sohngen, and Ross 2007). For example, a recent program in Alberta allowed farmers to join and be paid to continue practices that were already in use. This resulted in a large sign up (Thamo and Pannell 2016). It also means that a substantial part of the money did not stimulate an added amount of mitigation. A price discount is likely not the way to address the additionality concern, despite the fact that one was used in the Alberta implementation (Janzen et al. 2011). The problem is that such a discount would offer incentives to those already using the practice but may not be large enough to stimulate new people to begin the practice. Murray et al. (2016) explore this and develop an approach for adjusting the baseline. A final challenge in the implementation of mitigation policies is that posed by transactions costs arising when buyers must seek out sellers, performance must be monitored, and potential shortfalls must be insured. Stavins (1995) cites cases where mitigation schemes have failed because of high transactions costs. In agriculture, programs addressing small farms will likely have high transactions costs. For example, getting 10,000 tons of CO2 sequestration at an annual rate of 0.25 tonnes per acre, with an average farm size of 1 hectare would require assembling a group of 16,000 farmers—a costly proposition. The magnitude of sequestration transactions costs have been estimated in several cases. Jaraite, Convery, and Di Maria (2010) report a participation cost of $3.08 per ton for small emitters, $1.33 for medium, and $0.08 for large. Pearson et al. (2014) finds costs ranging from $0.09 to $7.71 per ton of CO2, resulting in a one-third increase in sequestration costs. Dealing with Co-benefits Many agricultural scientists advocate particular mitigation approaches—especially soil sequestration—based on co-benefits like reduced runoff and cleaner water. However, Elbakidze and McCarl (2007) argue that if decision makers consider the co-benefits of one action, then they should also consider co-benefits of all actions. In an example, these authors show essentially equal co-benefits for cutting back coal use (through improvements in local air quality) and for pursuing tillage-based soil sequestration. Since comprehensive co-benefit comparisons are burdensome, the authors suggest that co-benefits should be ignored, as is done in water project appraisal (Stoevener and Kraynick 1979). Agricultural Participation and Eligibility in Carbon Markets Much attention has been paid to the potential for agricultural climate mitigation (IPCC 2014b; OECD 2016). However, in practice, there has been limited agricultural participation in most carbon-trading markets. We feel this occurs for three principal reasons. First, rules and requirements for many types of agricultural projects are absent. For example, the California trading scheme has rules for forestry, manure management and rice, but none for other agricultural possibilities. Second, agriculture has generally not been capped but is rather viewed as a source of offsets and as such, needs rules to enter—but there are no such rules. Finally, most agricultural offsets exhibit some of the mitigation imperfections discussed above. However, many intended nationally-determined contributions (INDCs) submitted by countries under the Paris Climate Accord do have agricultural components (UNFCCC Secretariat 2016). Mitigation, Poverty, and Food Security Mitigation activities can reduce food supplies as they often compete with agricultural production (Murray et al. 2005). Havlik et al. (2011) argue that mitigation could have a bigger near-term impact on food security than CC. On the other hand, rising agricultural prices raise land values and agricultural revenues benefiting rural households, but higher prices disadvantage urban groups. Hussein, Hertel, and Golub (2013) find that land-based mitigation tends to increase poverty since poor households control little land but are vulnerable to food price rises. Also, Avetisyan et al. (2011) argue that carbon pricing could shift significant agricultural production from low- to high-income countries due to higher emission intensities in low-income farming. A proposed strategy to limit the poverty and food security impacts of mitigation involves using emission tax revenue to subsidize developing country producers. But Henderson et al. (2017) show this causes significant leakage, estimating that over two-thirds of the emission reductions are lost under this approach. Agricultural Economic Research Directions and Needs on Mitigation Work is needed to understand the true cost of mitigation strategies and associated transactions costs. First, economists should move cost estimation efforts beyond the common approach that provides estimates that are independent of volume. In particular, there should be supply curves reflecting that mitigation costs rise with the volume of emissions reduced, as well as the interrelationships between strategies. Second, economists need to examine “negative cost” (i.e., so called no-regrets) strategies. Enkvist, Naucler, and Rosander (2007) identify many “negative cost” strategies (such as the adoption of no-till) but, assuming rational producers, this likely indicates omitted considerations like risk, difficulties during initial implementation, capital turnover, or other factors such as fear of herbicide resistance. Third, economists could work on the cost-minimizing design of procedures for estimating and verifying mitigation volumes, as well as grading standards to account for imperfections in trading schemes. Additionally, economists could estimate the costs and benefits of alternative market designs. A fourth research opportunity involves the study of transaction costs and how they pass through to buyers and producers. New approaches to reduce transactions costs for agricultural producers to participate in mitigation activities are also needed. This might include ways to reduce the costs of brokerage, measurement, monitoring, verification, market administration, and insurance, among other factors. Fifth, research is needed on nonmarket and behavioral factors that inflate the sale price for offsets. For example, when considering afforestation, one may need to appraise the magnitude of incentives needed to induce farmers to abandon their traditional lifestyle and move their land into forests. Additionally, one may need to look at recreational values, and agro-tourism that may supplement farm incomes. Sixth, more work needs to be done on the practical ways of estimating leakage and including it in project appraisal and policy. Early estimates of indirect land use leakage rates associated with biofuels programs were quite large but have subsequently fallen by 90% (Hertel and Tyner 2013). Policy makers are also unclear about whether and how to include leakage adjustments. While leakage is mentioned in the EPA biogenic carbon rules, it is not factored into the calculation procedures (EPA 2014). A seventh area where research is needed involves the development of practical means for dealing with additionality, which means incentivizing additional offsets while avoiding paying for practices that farmers would have undertaken absent the policy Eighth, given the important role of agriculture in overall damages from climate change, there is an important opportunity to work on improving measures of the social cost of carbon (SCC), which currently either largely ignore agriculture, or utilize out-of-date impact estimates. Indeed, Moore, Baldos, and Hertel (2017) find that considering more recent agricultural damages more than doubles an economy-wide measure of SCC. Finally, future research could usefully examine the optimal level of adaptation versus mitigation investment compared to other possibilities like conventional research and development investment (see Wang and McCarl [2013] and the references therein). Conclusions Climate Change will be a central agricultural issue in the twenty-first century; there will be negative impacts from CC in some regions, and positive impacts in others. Over time, negative impacts will likely strengthen, while positive ones will diminish (IPCC 2014a). Crop and livestock production, water availability, and pest incidence will all be affected. These impacts not only constitute a shift in mean levels, but also shifts in variance and higher-order moments. Agricultural and applied economists can play a major role in identifying impacts and estimating economic consequences in agriculture and in other economic sectors. Furthermore, given its strong inter-disciplinary roots, the profession is well-placed to contribute to the emerging field of research into food-energy-water-climate nexus issues. As temperatures rise, society will inevitably need to develop adaptation strategies allowing efficient operations under foreseen levels of CC. Understanding the scope, limitations, and constraints to achieving such adaptation is an important topic for applied economic research. In the absence of strong mitigation action, and given likely limits on adaptation, we may expect much more damaging climate change, with potentially dire implications. Agricultural and applied economists can play an important role in estimating this vulnerability and determining the appropriate mix of mitigation and adaptation. The future of our planet rests on making sound decisions on these issues in upcoming decades. 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Climate Change as an Agricultural Economics Research Topic

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Oxford University Press
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© The Author(s) 2018. Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com
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2040-5790
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2040-5804
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10.1093/aepp/ppx052
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Abstract

Abstract Climate change is not just a topic for the future—it is already producing real consequences. Economically, the issue has three principal dimensions: impacts, that is, how vulnerable are we; adaptation, that is, what can we do to reduce the impacts by altering operations; and mitigation, that is, what can we do to reduce the drivers causing climate change and thus the long-term extent of climate change? All of these issues have economic dimensions, including appraising damages and the value of effects reducing actions, as well as the formulation of efficient policies. Thus, it is not surprising that this is both an active agricultural economic research area and one with many more research possibilities. We review the impacts, adaptation, and mitigation literature, identifying issues, summarizing main findings, commenting on methods, and pointing out research needs, with a special focus on what agricultural/applied economists have to offer. Climate Change (CC) is not solely a concern for the future. It is a concern for today. Relative to recorded global history: (a) the last three years have successively been the warmest in recorded history; (b) each of the five warmest years ever seen have occurred since 2010; (c) 16 of the 17 warmest years have occurred since 2000; and (d) it has been 40 years since the global annual temperature was below the twentieth century’s average (National Oceanic and Atmospheric Administration [NOAA 2017]). Additionally, according to the Intergovernmental Panel on Climate Change (IPCC 2014c), rainfall is changing in distribution and intensity, extreme events are increasing in severity and frequency, and many other changes are arising. As CC evolves, further changes are projected, with temperatures increasing by 2–4 °C by 2100, and by 1 °C over the next 25 years (see IPCC 2014c for discussion). Agricultural yields, costs, pests, and infrastructure needs are all being affected (IPCC 2014a). Historically, farming has evolved to adapt to local climates but those climates are shifting, and as CC proceeds, adaptations will require altered practices. Indeed, farmers are already adapting by adjusting planting dates, varieties planted, crop mix, and livestock populations, and agricultural economists are currently assessing the extent and value of such adaptation actions. Climate change is being driven in large part by the accumulation of greenhouse gas (GHG) concentrations in the atmosphere. Atmospheric carbon dioxide (CO2) concentration is up from an 1850 level of 275 parts per million (ppm) to over 406 ppm today, and considering all GHG heat forcing effects, this is equivalent to over 485 ppm (IPCC 2014c). Mitigation actions are being undertaken to reduce emissions, and agriculture is one of the larger emitting sectors. Globally, agricultural emissions make up an estimated 25% share of total emissions, and arise from cropping, livestock, and land use change (IPCC 2014b). Many have suggested that agricultural management can be altered as part of an overall effort to decrease GHGs, again raising economic issues of cost, best practices to follow, impact, and incentive design. Climate change is an active agricultural economic research area contributing to the economic endeavors discussed above, as well as numerous others. Here, we will review the existing body of work covering the three major aspects of the issue: agricultural impacts of climate change; adaptation to these impacts; and policies aimed at mitigating future climate change by limiting drivers. We attempt to describe the state of the art in each aspect and identify possible research directions. In so doing we will identify issues, summarize main findings, comment on methods, and point out research needs. One caveat is in order—the vast amount of literature does not allow us to be comprehensive, so we will only reference exemplary pieces, literature reviews, and recent novel papers. Impacts of Climate Change on Agriculture Climate change alters productivity, production costs, resource availability, market prices, welfare, poverty, and food security. In order to estimate economic impacts, economists generally need measures of potential CC impacts on physical productivity and input usage. These impacts have been estimated using either econometrics or process-based simulation models. Generally, the econometric approaches let us infer the future from the past by examining the impacts that climate has had across time and space. The simulation approaches can be less data-intensive, but embody strong assumptions about climate/production performance inter-relationships and model accuracy. Impact studies have examined implications for crops, livestock, land, water, labor, infrastructure, factor productivity, and environmental quality. Broadly, impacts are negative under extreme heat or cold, with lesser impacts in between and a general inverted-U shape, plus impacts can be positive in cold areas. Specific findings by broad agricultural attribute follow. Crop Yield Studies There are many econometric studies of climate impacts on crops. Across this body of literature, evidence has been found of the following: (a) non-stationary crop yield distributions, with mean and variance being strongly affected by changes in temperature and precipitation (McCarl, Villavicencio, and Wu 2008); (b) alterations in higher-order moments of yield distributions (Tack, Harri, and Coble 2012); (c) temperature thresholds for crops, above which additional heat becomes damaging (potentially severely) as temperature continues to rise (Schlenker and Roberts 2009); (d) mixed signs and magnitudes of yield impacts across locations, with low latitude areas tending to have negative impacts (McCarl, Villavicencio, and Wu 2008); and (e) substantial CO2 sensitivity of C3 crop yields plus impacts on C4 yields when drought occurs (Attavanich and McCarl 2014). Crop yield impacts have also been widely estimated via simulation (e.g., see the Reilly et al. 2002 review). Findings are: (a) there are spatially varying impacts; (b) inclusion or omission of CO2 impacts cause disparate results (Reilly et al. 2002); (c) econometric and simulation estimates converge when key factors (like CO2) are controlled (Lobell and Asseng 2017); (d) performance in tropical areas has been poor as models are generally developed in temperate locations (Hertel and Lobell 2014), although recent improvements have been made. Climate change also impacts yield through influence on extremes (IPCC 2014a). Studies have examined impacts of shifts in severity and/or frequency of: (a) El Nino – Southern Oscillation events (Chen, McCarl, and Adams 2001); (b) hurricanes (Chen and McCarl 2009); (c) hot days (Lobell et al. 2013); (d) intra-annual temperature variability, rainfall intensity, and drought frequency (Attavanich and McCarl 2014); and (e) wildfires as they impact rangelands and forests (Pausas and Keeley 2014). Climate change also has indirect crop production impacts including: (a) pesticide cost increases (Chen and McCarl 2001) and (b) ozone damages which (Lobell and Asseng 2017) argue are likely to be quite large. More generally factor productivity and rates of yield growth will be impacted (Villavicencio et al. 2013; Attavanich and McCarl 2014) Livestock Studies Livestock will be affected by CC, although studies are sparser on this topic, and widely available simulation models do not exist. Experiments and observations have shown that CC affects rates of gain, milk production, mortality, feed intake, illness, disease and parasites, conception rates, feed supplies, carrying capacities, and grass nutrition (Mader 2014). Key and Sneeringer's (2014) econometric analysis found modest reductions in milk yields under CC, with the largest declines in the south, while Yu (2014) found that temperature increases result in reduced fed cattle sale weights, particularly in the south. Additionally, Mu, McCarl, and Wein (2013) found that CC likely contributes to the spread of avian influenza. Land Value and Use Studies Mendelsohn, Nordhaus, and Shaw (1994) used a hedonic approach—dubbed the “Ricardian” approach—to examine CC influences on U.S. land rental rates finding CC increases rents. There have been many applications of the Ricardian approach, along with debates over weaknesses and extensions (see the review in Chatzopoulos and Lippert 2016). Certainly, the approach does not factor in market-price adjustments or CO2 impacts. Additionally (Schlenker, Hanemann, and Fisher 2007) find that: (a) land value models suffer from misspecification problems with respect to irrigation; (b) shifts in water availability have a negative impact on irrigated land rents; and (c) more hot days have a negative impact on rents, except in northern latitudes. Climate change will also affect land use—perhaps most dramatically through the loss of land to rising seas—particularly in low-lying cropped areas (Chen, McCarl, and Chang (2012)). Salt-water intrusion associated with sea level rise is also a threat. A less dramatic but ongoing effect involves shifts in crop mix and land use arising due to CC impacts on productivity (Attavanich et al. 2013). Nelson et al. (2009) find that CC may induce reductions in the global land area suitable for crops, while Mu, McCarl, and Wein (2013) find that CC causes shifts between cropping and grazing and Cho and McCarl (2017) find that CC induces crop mix shifts. Water Climate change will alter precipitation patterns and thus also alter surface water supplies and ground water recharge (IPCC 2014c). An emerging consensus seems to be that dry areas will become drier, which would be problematic for farming in many parts of the world (Kumar et al. 2015). This will alter urban and agricultural water demands; Chen, Gillig, and McCarl (2001) estimate that CC impact would cause a 3% increase in urban water demand in San Antonio, Texas. Agricultural irrigation demands would also change with increases in hotter areas (Reilly et al. 2002). The potential for overcoming CC water effects via irrigation expansion is location-specific. In the western United States (Elias et al. 2016) assert that irrigation expansion is unlikely. However, there is potential for expanded irrigation in the eastern United States (Gollehon and Quinby 2007), which has already been increasing in recent decades. Labor Supply and Health In much of the world, farming is labor intensive -- often under hot conditions. Kjellstrom et al. (2009) estimate that, under a hot scenario, 2080’s labor work capacity will fall by 11% to 27% in Southeast Asia, Andean and Central America, and the Caribbean. Farmers in wealthier regions can avoid this exposure by using air-conditioned equipment. Health is also climate-change sensitive, and a number of impacts are directly relevant for agriculture, including effects on food demand and nutrition, as well as rural labor supply. We will not deal with the topic here, but rather refer the reader to the reviews in Patz et al. (2014) and the health chapter of IPCC (2014a). Infrastructure Shifts in the amount of food being produced, its location, and the loss of coastal areas to sea level rise also have implications for agricultural infrastructure. Antle and Capalbo (2010) discuss the potential impact of shifting production patterns on locations of storage, shipping facilities, and rail infrastructure (as analyzed in Attavanich et al. 2013). Sea level rise will also affect port capacity. Additionally changing patterns of agricultural product flows will have implications for needed rural roads and bridges. These shifts in production patterns will also alter infrastructure demands more broadly, for example, creating new geographic needs for input supply and processing facilities (as observed for salmon by Hermansen and Heen 2012). Environmental Quality Climate change can also have significant effects on environmental quality. Shifts can occur in ecosystems and their services (IPCC 2014a), pest populations, and in turn pesticide runoff (Shakhramanyan, Schneider, and McCarl 2013), soil erosion (Segura et al. 2014), and biodiversity (Bellard et al. 2012). Khanna, Swinton, and Messer (2018) provide coverage of approaches to such issues in a companion paper in this issue. Markets, Prices, Welfare, Food Security, and Poverty Most of the literature has equated CC with rising prices and diminished food security (IPCC 2014a). Given the relatively price-inelastic nature of food demand, the market consequences of CC can be large (Reilly et al. 2002). However, rising prices can benefit farmers, and the price rise can be sufficient to offset the adverse impacts but consumers uniformly lose (Butt et al. 2005). Hertel and Rosch (2010) discuss CC effects on labor markets, noting that, in some cases, CC can cause farmers to hire more labor, thereby spreading beneficial impacts across the rural economy. Hertel, Burke, and Lobell (2010) found that in 2030 CC increased prices and reduced rural poverty rates in about half the countries they studied. Indirect evidence can also be drawn from developments during the 2007–2012 commodity crisis, where in many countries, higher prices contributed to reductions in rural poverty (Headey 2014). On the other hand, urban poor are likely to be hurt (Ahmed, Diffenbaugh, and Hertel 2009). This underscores the importance of considering food demand curves in CC analyses, as well as the rural/urban distribution of poverty. Agricultural Economic Research Directions on Impacts A number of impact areas merit additional research. There is a broad need for research on heat-tolerant crops and those beyond grains and oilseeds. From an economic perspective, including heat-tolerant crops in models can reduce the consequences of CC. Indeed, contrasting the results of Adams et al. (1990) and (Reilly et al. 2002) shows that including cotton, sorghum, and tomatoes dramatically reduced net damages. Furthermore, some heat-tolerant crops are regionally predominant and their omission biases impact estimates. Finally, the overwhelming emphasis on grains and oilseeds to date overlooks the fact that many other crops are important around the world, and an understanding of their CC sensitivity is needed to estimate regional and global CC consequences. Climate change research is also needed on economic impacts and the extent of the following: increased ozone; altered livestock performance and mortality; expanded ranges of pests, parasites, and diseases; altered extreme event frequency; altered water supplies; changes in non-agricultural water demand; rates of aquifer depletion; changes in grass growth and forage nutritional content; changes in environmental quality; impacts on total factor productivity as almost all research to date has focused on CC impacts on yields; and consequences of the total array of CC impacts for food prices and security. The role of elevated atmospheric CO2 in stimulating crop growth and the resulting damages from CC also merits more attention. For example, a recent special issue of Agricultural Economics on CC impacts (Nelson et al. 2014) completely ignored CO2, concluding that CC would have a dramatic impact on food prices by mid-century. However, other studies have shown CO2 consideration greatly lowers damage estimates (Reilly et al. 2002). This issue cannot be simply waved away due to uncertainty in impacts. Finally, while we have emphasized CC impact on agriculture, agricultural and applied economists have the right skill-set to make important contributions in the measurement of impacts across the entire economy (Carleton and Hsiang 2016). Adaptation Climate change impacts cause producers to alter their operations to reduce adverse impacts or exploit opportunities. This is referred to as “adaptation” in the literature. Agriculture has always adapted to the local climate, but today we face an unprecedented rate of change that increases the required adaptation effort. Furthermore, adaptation is a necessary endeavor given the future projected temperature path in the next 25 years wherein roughly 1 degree of temperature increase is virtually assured. Adaptation studies involve observing what has happened, examining new strategies that might be employed, and evaluating their economic implications. Economic Studies on Adaptation The EPA (2013) indicates that “The average length of the growing season in the contiguous 48 states has increased by nearly two weeks since the beginning of the 20th century.” This has been accompanied by earlier planting times. Changing crop mix and shifts out of cropping to grazing are other forms of adaptation. Cho and McCarl (2017) find that temperature increases were associated with several U.S. crops moving north and west, as well as to higher elevations. Mu, McCarl, and Wein (2013) show a movement of land from cropping to pasture/range when temperatures and precipitation pass thresholds. Employing irrigation, better managing water, using water-conserving practices, and building infrastructure are also observed crop adaptations (Howden et al. 2007), as is an increase in pesticide use (Chen and McCarl 2001). On a broader scale, adaptation can involve shifts in patterns of international trade for exploiting the climate-influenced comparative advantage of different regions (Baldos and Hertel 2015).1 1 For more discussion of international trade, see the companion paper in this issue by Martin (2018). Livestock systems also exhibit adaptation. Actions may involve land use change, operation size shifts, species or breed alterations, stocking rate changes, and rangeland-related alterations. Seo and Mendelsohn (2008) found that African livestock species mixes shift with temperatures, with higher temperatures favoring small ruminants. Zhang, Hagerman, and McCarl (2013) found that in Texas, more heat-tolerant cattle breeds (Brahman) were selected under hotter conditions, and Angus breeds were selected under cooler conditions. Briske et al. (2015) review evidence on rangelands, and show adaptations in the form of adjusted stocking rate, altered season of grazing, and changes in pest management. Gaughan et al. (2009) identified livestock adaptations in the form of the following: adjustments in feeding including altered forages; provision of shade, misting and water; and relocation to different regions. Howden et al. (2007) found that more integrated crop and livestock production systems arise under CC. An additional source of adaptation involves changes in institutions governing the natural resources that are influenced by climate change, such as water. Anderson and Hill (2004) indicate that the dry conditions in the western United States led to the use of prior-appropriation water rights as opposed to the English riparian system in the wetter eastern United States. Others have found that water scarcity has led to water trading markets (see discussion in Colby 1988). Similarly, a major drought stimulated California to pass a law that required sustainability plans for groundwater basins facing overdraft (California Department of Water Resources 2016). Adaptation invariably incurs costs, and these must be weighed against the prospective benefits that arise from limiting damages or exploiting opportunities. Howden et al. (2007) found that adaptation actions involved with shifts in crop mixes, livestock species, or livestock breeds decease the realized costs of drought and heat waves. Butt, McCarl, and Kergna (2006) found that altering crop mixes and adopting drought-resistant varieties increases welfare while decreasing countrywide risk of hunger. Aisabokhae, McCarl, and Zhang (2011) find that adaptations in crop-planting dates and time to maturity were the most valuable among a number they studied. Yu and Babcock (2010) find that crop variety shifts increase yields under increased drought frequency, altered pest populations, and heat increases. Mendelsohn and Dinar (1999) compare econometric results with those from crop growth simulations and conclude that the potential damages from CC could be reduced by up to 50% through adaptation. Chen, McCarl, and Chang (2012) find that increases in the rate of technical progress rates can offset CC impacts on yields and sea level-induced land loss. Butt, McCarl, and Kergna (2006) find that adaptation generally worsens producer surplus and increases consumer surplus. Additionally, the public cost of supporting agricultural adaptation through fixed capital formation, infrastructure development, research and development, extension, and transitional assistance has been estimated at about 14 billion USD/year (IPCC 2014a). One missing piece from many adaptation studies is the cost of actually carrying out the adaptation with many costs like research and development on new varieties and practices, information dissemination, changes over in equipment, infrastructure modification, and many others being largely unexplored. McCarl (2007) provides crude estimates of the cost of various adaptation components, and shows them to be large. Such costs are typically neglected in models allowing adaptation. For more on this, see the discussion in Antle and Capalbo (2010). Commonly, models treat the alteration in crop mixes and the emergence of new varieties as costless. Other Dimensions of Adaptation Adaptation can be performed by natural ecosystems as well as humans. Natural adaptations result from ecosystem reactions to a changed climate (e.g., altered bird migrations, mixes of vegetation, or pest ranges). Human adaptations have been categorized as being either autonomous or planned (IPCC 2014a). In an economic setting, these are better defined as private and public adaptations. Economically autonomous adaptations are those undertaken by private entities acting in their own best interests. Planned, or more accurately, public adaptations refer to those undertaken by government addressing market failures and public goods which would be underinvested in private markets such as seawalls, information provision, forms of plant breeding, and dam construction (McCarl, Thayer, and Jones 2016). Public actions in support of private adaptations also arise to correct information failures and resource limits, as will be discussed below. Of course there are important limits to human adaptation, including the following: knowledge, awareness, and technological state; physical and biological characteristics, economic and financial resource availability, human capital; social and cultural barriers; and governance and institutions (IPCC 2014a). Economic considerations pose another set of barriers. These include transaction costs, information costs, the public goods nature of some adaptations, and missing markets. Finally, individual attitudes can limit adaptation. Some individuals simply do not believe in climate change, or they may find adaptations to be in conflict with other practices and cultural norms. It is also important to consider the possibility that adaptation to the current climate is incomplete. Burton and May (2004) term this an adaptation deficit. For example, a region facing a future with more flooding may not be well-adapted to current flooding. Furthermore, adaptation will not overcome all climate impacts, leaving residual damages. Species extinction is a form of damage that is practically irreversible. The existence of such adaptation deficits and residual damages is economically rational if the cost of eliminating them exceeds the cost of the ensuing damages—although the latter may be difficult to quantify. Another dimension of adaptation is termed maladaptation, which describes a situation where actions by one party worsen the adaptation status of others (Barnett and O’Neill 2010). This involves adaptation actions that increase vulnerability for: the adapting party now (via poor implementation); the adapter in the future (e.g., through excessive current use of scarce resources); parties elsewhere (e.g., employing adaptation via water reuse lowers water availability to downstream parties); and other parties in the future (increasing pumping now and depleting an aquifer). From a strictly economic standpoint, maladaptation actions can be rational if gains to the adapter are large enough to compensate those who face increased vulnerability. However, such compensation is rarely paid, leaving the vulnerable segment of the population worse off. As noted above, one research direction involves examining behavior to see what types of adaptations have occurred. There are two major issues in this regard. First, one must realize that not all possible adaptations will be observable in that observed practices are influenced by the range of prices that have occurred and the technology available. For example, within the United States, labor and capital prices have favored capital relative to labor, thereby reducing observations of labor-using adaptations. Additionally, when climate change alters production it may induce new technologies and permit previously unobserved adaptation possibilities. Second, some items identified as adaptations may not really be so. Lobell (2014) argues that many proposed CC “adaptations” do not become more beneficial as CC evolves, and are adaptation illusions not substantially lessening vulnerability or exploiting opportunities. The meta-analysis by Moore et al. (2017) confirms this conjecture, revealing that virtually all adaptation benefits in the studies assembled by the IPCC under AR5 (Challinor et al. 2014) do not yield benefits that depend on changes in temperature or precipitation. This is not to say that such investments are bad ideas—they simply do not diminish the impacts of CC. Agricultural Economic Research Needs and Directions on Adaptation Many adaptation-related economic research possibilities exist. First, it is important to continue work on identifying possible adaptations, examining the prevalence and nature of observed adaptations, plus the costs and benefits of adaptations as CC evolves. Research is also needed on the appropriate levels of public investment in adaptation, along with identifying investments that will be privately implemented without the need for public assistance. For example, how much should the public invest in education today, or development of drought-tolerant varieties, or constructing water storage? Such work needs to consider uncertainties, lag times, and irreversibility. Another research direction involves developing criteria and scoring rules that can be used in adaptation project evaluation. The UNFCCC Paris Climate Accord established a multi-billion dollar annual fund for the support of adaptation and mitigation activities. In allocating those funds, potential investments will need to be evaluated, ranked, and ultimately selected or denied for funding. McCarl, Thayer, and Jones (2016) indicate that evaluations will need to confront issues such as additionality, permanence, uncertainty, and the potential for maladaptation. Finally, work is needed on estimating associated transactions and implementation costs, and building them into models that simulate choices among adaptation possibilities. Mitigation Mitigation refers to actions to lessen future CC by reducing the underlying drivers. In an agricultural context, this mainly involves actions to reduce net GHG emissions. Agriculture, forestry, and other land use represent an important emissions source, with an estimated 24% share globally (IPCC 2014b). Production-related CO2 emissions are modest, but these sectors emit a major share of non-CO2 GHGs and release large volumes of CO2 when forested lands are converted to agriculture (Gibbs et al. 2010). McCarl and Schneider (2000) divided agricultural mitigation possibilities into three categories. First, agriculture can reduce direct emissions through alterations in manure management, livestock feeding, fossil fuel use, nitrogen fertilizer use, and rice cultivation, among other actions. Second, agriculture can increase carbon sequestration by employing less-intensive tillage, avoiding deforestation, avoiding conversion of grasslands into cropping use, and reverting croplands to grass or trees. Third, agriculture could produce commodities that substitute for emission-intensive products such as bioenergy or wood in place of concrete and steel in construction (see Smith et al. 2008 for detailed lists). Appraising the Impacts and Potential for Agricultural Mitigation Actions Many studies have examined economic aspects of GHG mitigation efforts. At the sector level, Murray et al. (2005) find in the United States that: (a) agricultural emission reductions, sequestration enhancements, and bioenergy offsets can mitigate GHGs at relatively low “carbon” prices (really prices for CO2 equivalent amounts); (b) the sector is capable of meeting the U.S. level of net emission reductions that would have been required to comply with the Kyoto Protocol; (c) there is an upward-sloping aggregate supply curve of mitigation potential where there are different optimal strategies to employ depending on carbon price; (d) agricultural soil carbon sequestration is competitive and dominant at low prices for about 20 years, but the amount falls at higher prices due to saturation and land competition from other mitigation possibilities; (e) marginal abatement supply curves for individual strategies are generally misleading because they ignore inter-strategy resource competition (land moving into bioenergy precludes using the land for afforestation, improvements in fertilization practices and less intensive tillage); (f) at low carbon prices, activities complementary with current production dominate (i.e., alterations in tillage and forest management), while at higher prices strategies that substitute for conventional crop production take over (i.e., biomass-fueled electricity and afforestation); and (g) mitigation competes with food production, decreasing production, and exports while increasing food prices, with an increasing impact as carbon prices rise. Studies have also investigated the importance of time when considering sequestration since continued sequestration eventually results in saturation of the soils and forests. Lee et al. (2007) find that sequestration initially increases but then stabilizes or falls (agricultural soil accumulation ceases within about 25 years, while forest accumulation continues for 50 years but then declines due to forest product harvest). In contrast, cumulative GHG reductions from most other agricultural mitigation strategies continue to grow over time. Agricultural mitigation has been found to be an important asset in comprehensive mitigation efforts. Rogelj et al. (2015) show that ignoring or restricting the scope of mitigation activity substantially increases the costs of meeting CC goals like limiting temperature increase. Fawcett and Sands (2006) come to similar conclusions when including or omitting non-CO2 GHG emission reduction. This body of literature has identified a number of imperfections and challenges for the implementation of mitigation actions. The first of these is an issue with permanence, which arises in the context of carbon sequestration where carbon is typically sequestered in a volatile form. For example, carbon sequestered in trees will be released if fires or forest harvest occur. Further, sequestration in soils will be lost if substantial soil disturbance occurs. Importantly, permanence is often cited as a reason for omitting sequestration from lists of eligible strategies (Dutschke 2001). Additionally, observed prices for sequestration projects (specifically afforestation or forest management) have been much lower under the Clean Development Mechanism (CDM) trading than those for other opportunities, in part reflecting permanence (Conte and Kotchen 2010). Another permanence concern involves possible costs of maintaining sequestration after the rate of accumulation has effectively fallen to zero. This may mean that further incentives are needed to retain the carbon. For example, if one pays a landowner for afforestation, then in the long run carbon accumulation stops—as might payments—but one may need to incentivize the landowner to retain the sequestration. Some have suggested that permanence be addressed by leasing sequestered carbon rather than selling it (Marland, Fruit, and Sedjo 2001). Kim, McCarl, and Murray (2008) investigate how permanence issues affect a buyer’s willingness to pay for sequestration projects with permanence risks. Examining plausible cases, these authors find that price discounts could be much greater than 50%, thereby supporting the finding of lower prices for sequestration under the CDM, and the reluctance to include sequestration in trading schemes. Kim, McCarl, and Murray also argue that a grading standard may be needed to render the mitigation alternatives fungible. Another challenge to mitigation action is posed by leakage that occurs when mitigation projects reduce commodities entering the market place and, in response to higher prices, producers elsewhere replace the lost production. Murray, McCarl, and Lee (2004) develop a leakage-based price discount formula considering the following: market share of the displaced commodity; elasticity of supply outside of the project area; total market demand elasticity; and ratio of emissions when producing the commodity inside and outside a target area. Exploring leakage possibilities for forestry and agriculture cases shows some price discounts exceeding 50%. Additionally, these authors argue that small projects that displace small market shares will have large amounts of leakage, contradicting the widely-held belief that small projects lead to no leakage. The also indicate that leakage can only be eliminated through global coverage. The indirect land use issue that has arisen in the bioenergy arena as reviewed in Hertel and Tyner (2013) is also a form of leakage. In addition, the extent of GHG reduction due to the execution of a mitigation project is in many cases uncertain. Kim and McCarl (2009) assert that this will lead to lower prices relative to strategies with known impacts, and thus derive a formula for a price discount. These authors also examine the uncertainty-narrowing aspects of spreading mitigation activity over space and time. Rose et al. (2014) discuss sources of uncertainty in international trading which arises due to conditions in the country where the project is implemented, international program rules, as well as project performance and the risk of transaction cancellation. Another challenge facing those seeking to implement agricultural mitigation policies stems from the difficulty of assessing a project’s additionality. Cases have arisen where mitigation payments could be made for existing practices or those that would have occurred in the absence of the payment. Such practices do not contribute to mitigation and are not “additional” (Murray, Sohngen, and Ross 2007). For example, a recent program in Alberta allowed farmers to join and be paid to continue practices that were already in use. This resulted in a large sign up (Thamo and Pannell 2016). It also means that a substantial part of the money did not stimulate an added amount of mitigation. A price discount is likely not the way to address the additionality concern, despite the fact that one was used in the Alberta implementation (Janzen et al. 2011). The problem is that such a discount would offer incentives to those already using the practice but may not be large enough to stimulate new people to begin the practice. Murray et al. (2016) explore this and develop an approach for adjusting the baseline. A final challenge in the implementation of mitigation policies is that posed by transactions costs arising when buyers must seek out sellers, performance must be monitored, and potential shortfalls must be insured. Stavins (1995) cites cases where mitigation schemes have failed because of high transactions costs. In agriculture, programs addressing small farms will likely have high transactions costs. For example, getting 10,000 tons of CO2 sequestration at an annual rate of 0.25 tonnes per acre, with an average farm size of 1 hectare would require assembling a group of 16,000 farmers—a costly proposition. The magnitude of sequestration transactions costs have been estimated in several cases. Jaraite, Convery, and Di Maria (2010) report a participation cost of $3.08 per ton for small emitters, $1.33 for medium, and $0.08 for large. Pearson et al. (2014) finds costs ranging from $0.09 to $7.71 per ton of CO2, resulting in a one-third increase in sequestration costs. Dealing with Co-benefits Many agricultural scientists advocate particular mitigation approaches—especially soil sequestration—based on co-benefits like reduced runoff and cleaner water. However, Elbakidze and McCarl (2007) argue that if decision makers consider the co-benefits of one action, then they should also consider co-benefits of all actions. In an example, these authors show essentially equal co-benefits for cutting back coal use (through improvements in local air quality) and for pursuing tillage-based soil sequestration. Since comprehensive co-benefit comparisons are burdensome, the authors suggest that co-benefits should be ignored, as is done in water project appraisal (Stoevener and Kraynick 1979). Agricultural Participation and Eligibility in Carbon Markets Much attention has been paid to the potential for agricultural climate mitigation (IPCC 2014b; OECD 2016). However, in practice, there has been limited agricultural participation in most carbon-trading markets. We feel this occurs for three principal reasons. First, rules and requirements for many types of agricultural projects are absent. For example, the California trading scheme has rules for forestry, manure management and rice, but none for other agricultural possibilities. Second, agriculture has generally not been capped but is rather viewed as a source of offsets and as such, needs rules to enter—but there are no such rules. Finally, most agricultural offsets exhibit some of the mitigation imperfections discussed above. However, many intended nationally-determined contributions (INDCs) submitted by countries under the Paris Climate Accord do have agricultural components (UNFCCC Secretariat 2016). Mitigation, Poverty, and Food Security Mitigation activities can reduce food supplies as they often compete with agricultural production (Murray et al. 2005). Havlik et al. (2011) argue that mitigation could have a bigger near-term impact on food security than CC. On the other hand, rising agricultural prices raise land values and agricultural revenues benefiting rural households, but higher prices disadvantage urban groups. Hussein, Hertel, and Golub (2013) find that land-based mitigation tends to increase poverty since poor households control little land but are vulnerable to food price rises. Also, Avetisyan et al. (2011) argue that carbon pricing could shift significant agricultural production from low- to high-income countries due to higher emission intensities in low-income farming. A proposed strategy to limit the poverty and food security impacts of mitigation involves using emission tax revenue to subsidize developing country producers. But Henderson et al. (2017) show this causes significant leakage, estimating that over two-thirds of the emission reductions are lost under this approach. Agricultural Economic Research Directions and Needs on Mitigation Work is needed to understand the true cost of mitigation strategies and associated transactions costs. First, economists should move cost estimation efforts beyond the common approach that provides estimates that are independent of volume. In particular, there should be supply curves reflecting that mitigation costs rise with the volume of emissions reduced, as well as the interrelationships between strategies. Second, economists need to examine “negative cost” (i.e., so called no-regrets) strategies. Enkvist, Naucler, and Rosander (2007) identify many “negative cost” strategies (such as the adoption of no-till) but, assuming rational producers, this likely indicates omitted considerations like risk, difficulties during initial implementation, capital turnover, or other factors such as fear of herbicide resistance. Third, economists could work on the cost-minimizing design of procedures for estimating and verifying mitigation volumes, as well as grading standards to account for imperfections in trading schemes. Additionally, economists could estimate the costs and benefits of alternative market designs. A fourth research opportunity involves the study of transaction costs and how they pass through to buyers and producers. New approaches to reduce transactions costs for agricultural producers to participate in mitigation activities are also needed. This might include ways to reduce the costs of brokerage, measurement, monitoring, verification, market administration, and insurance, among other factors. Fifth, research is needed on nonmarket and behavioral factors that inflate the sale price for offsets. For example, when considering afforestation, one may need to appraise the magnitude of incentives needed to induce farmers to abandon their traditional lifestyle and move their land into forests. Additionally, one may need to look at recreational values, and agro-tourism that may supplement farm incomes. Sixth, more work needs to be done on the practical ways of estimating leakage and including it in project appraisal and policy. Early estimates of indirect land use leakage rates associated with biofuels programs were quite large but have subsequently fallen by 90% (Hertel and Tyner 2013). Policy makers are also unclear about whether and how to include leakage adjustments. While leakage is mentioned in the EPA biogenic carbon rules, it is not factored into the calculation procedures (EPA 2014). A seventh area where research is needed involves the development of practical means for dealing with additionality, which means incentivizing additional offsets while avoiding paying for practices that farmers would have undertaken absent the policy Eighth, given the important role of agriculture in overall damages from climate change, there is an important opportunity to work on improving measures of the social cost of carbon (SCC), which currently either largely ignore agriculture, or utilize out-of-date impact estimates. Indeed, Moore, Baldos, and Hertel (2017) find that considering more recent agricultural damages more than doubles an economy-wide measure of SCC. Finally, future research could usefully examine the optimal level of adaptation versus mitigation investment compared to other possibilities like conventional research and development investment (see Wang and McCarl [2013] and the references therein). Conclusions Climate Change will be a central agricultural issue in the twenty-first century; there will be negative impacts from CC in some regions, and positive impacts in others. Over time, negative impacts will likely strengthen, while positive ones will diminish (IPCC 2014a). Crop and livestock production, water availability, and pest incidence will all be affected. These impacts not only constitute a shift in mean levels, but also shifts in variance and higher-order moments. Agricultural and applied economists can play a major role in identifying impacts and estimating economic consequences in agriculture and in other economic sectors. Furthermore, given its strong inter-disciplinary roots, the profession is well-placed to contribute to the emerging field of research into food-energy-water-climate nexus issues. As temperatures rise, society will inevitably need to develop adaptation strategies allowing efficient operations under foreseen levels of CC. Understanding the scope, limitations, and constraints to achieving such adaptation is an important topic for applied economic research. In the absence of strong mitigation action, and given likely limits on adaptation, we may expect much more damaging climate change, with potentially dire implications. Agricultural and applied economists can play an important role in estimating this vulnerability and determining the appropriate mix of mitigation and adaptation. The future of our planet rests on making sound decisions on these issues in upcoming decades. 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