Measuring Climate Change Impacts on Agriculture: An Equilibrium Perspective on Supply-Side Approaches
A popular approach for estimating climate change impacts on agriculture is to rely on supply-side reduced-form regressions. These methods, which include the Ricardian approach, focus on how farmers and agricultural land market react to changes in climatic conditions, under the implicit assumption that crop prices stay constant. To test whether this assumption is innocuous, I use a quantitative trade model of global agricultural markets to emulate the findings of a supply-side approach as well as to calculate welfare changes accounting for price changes. The results show that both welfare measures are weakly correlated and can be of opposite signs, and that the supply-side approach tends to underestimate the cost of climate change. The main drivers of these differences are the neglects of the imperfect substitutability of crops in demand and of terms-of-trade changes. The supply-side approach provides a valid approximation of the welfare cost of climate change only if crops are almost perfectly substitutable in demand and trade costs are neglected, a situation in which it is reasonable to assume constant prices.
I am grateful to François Bareille, Stéphane De Cara, Raja Chakir, Carl Gaigné, Alexandre Gohin, Charlotte Janssens, Pierre Mérel, Guy Meunier, Will Martin, Clément Nedoncelle, and José De Sousa for helpful comments; and to seminar audiences at the NBER Agricultural Markets and Trade Policy, EAERE 2020 annual conference, EAAE 2021 triennial congress, AFSE 2022 annual conference, AgroCampusOuest-SMART, AgroParisTech, University of Illinois, Urbana-Champaign, and SLU. This work is supported by the Convergence Institute CLAND [ANR-16-CONV-0003]. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.