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.