Accounting for externalities in cross-sectional economic models of climate change impacts

Michele Moretti, Janka Vanschoenwinkel and Steven Van Passel

No 303704, 94th Annual Conference, April 15-17, 2020, K U Leuven, Belgium (Cancelled) from Agricultural Economics Society - AES

Abstract: Environmental effects and natural resources depletion associated with agriculture production affect the agriculture response to climate change. Traditional cross-sectional climate response models ignore this requirement. This research estimates the impact of climate on European agriculture using a continental scale Ricardian analysis. We correct farm income by accounting for resources (energy, fertilizers, pesticides and water) use intensity by calculating the sustainable value for a sample of 9,497 specialized field crop farms across Europe. The results show that a uniform increase in temperature (+1°C) across all four seasons lead to significant and negative effects on farmland values, net revenue and farms’ sustainable value, while additional precipitation (+1 cm) across the all seasons increases farms' land values and sustainable values, and harms farms’ net revenue. Compared with the traditional Ricardian method, the marginal effect of 1° C increase in temperature shift from positive to negative in Northern countries, while it leads to less damages in Southern countries when net revenue and farms’ sustainable values are used as dependent variables. We demonstrate that accounting for the environmental effects and depletion of natural capital by agriculture significantly improves the ability of the Ricardian method to estimate agriculture climate response functions in the long run.

Keywords: Environmental Economics and Policy; Farm Management; Land Economics/Use (search for similar items in EconPapers)
Pages: 14
Date: 2020-04
New Economics Papers: this item is included in nep-agr and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aesc20:303704

DOI: 10.22004/ag.econ.303704

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