The impacts and vulnerabilities highlighted in the preceding parts of this report have given greater urgency to the need for concerted international action. Indeed, there has been an observable shift in policy perspectives onto the economic basis for accelerating mitigation responses. The Stern Review on the Economics of Climate Change in the UK (Stern, 2006), made a compelling statement that significant early action was vital in tackling climate change and the costs to the global economy would be minimal in comparison with the damage costs of no action. The Stern Review was relatively unusual at the time in that it was commissioned by the Chancellor of the Exchequer of the United Kingdom and gave a very different message from that of most mainstream economists at the time. The report provides evidence showing that ignoring climate change will eventually damage economic growth and create risks of major disruptions to economic and social activity in the later part of the century. The report's treatment of future damage costs (i.e. the discount rate assumptions) were not universally accepted by some economists. However, it brought the economic issues around climate change to the forefront of national and international policy and showed that climate change was an issue important to sectors beyond the environment and agriculture. The Stern Review estimated that the overall costs and risks of climate change would be equivalent to losing at least 5% of global GDP each year, now and forever, if no action is taken. If a broader collection of risks and impacts is taken into account, damages could increase to 20% of GDP or more. On the positive side, Stern estimates that the costs of taking action to avoid the worst impacts of climate change could be limited to around 1% of global GDP per year. The review does not disaggregate sectoral costs and therefore does not provide figures specifically for agriculture.
In the same year, the IPCC produced its Fourth Assessment Report (AR4), which produced more evidence and stronger statements regarding the anthropogenic influence on the climate and changes in physical and biological systems. The report stated that as well as mean warming, some large-scale climate events have the potential to cause very large impacts, especially after the 21st century, including very large sea-level rises resulting from widespread deglaciation, as well changes in circulation systems. The AR4 also summarised research on costs of climate change, reporting that global mean losses could be 1-5% of GDP for 4°C of warming. The IPCC also made the strong statement that unmitigated climate change would, in the long term, be likely to exceed the capacity of natural, managed and human systems to adapt.
In 2008, the Australian Government commissioned its own review of climate change, the Garnaut Review (Garnaut, 2008). The central question the review addressed was what extent of global mitigation provides the greatest gains from reduced risks of climate change over costs of mitigation. The review also addressed adaptation to climate change and the specific role of Australia in global mitigation. Like Stern, the review highlights the point that continued high emissions growth with no mitigation action carries high risks, also for the Australian climate, which already experiences problems associated with water shortages. The review promotes the use of international emissions trading as a means of reducing emissions.
A number of large research projects have been carried out in recent years assessing various aspects of climate change, including PESETA, ADAM and Ensembles. More detail on these projects is provided in Annex A.
Global economic assessments provide a compelling policy message on the need to advance intervention on emissions reductions. These assessments are built up from more detailed sector-specific information. Decision-making and prioritising adaptation and mitigation at a local, or even national, level require targeted information on sector-specific economic impacts. Sectoral studies investigating the impact costs on agriculture use diverse analytical tools primarily based on agronomic approaches and so-called Ricardian approaches and models. Agronomic research examines the impact of climate change parameters on particular crops in order to extrapolate to wider environments and situations with an altered climate, while Ricardian models draw analogues from the differential climate affecting farming areas and use land values or other proxies to extrapolate the impact of a changed climate. All of these approaches are reviewed in Reilly et al. (1996); Mendelsohn et al. (2000) and others.
Impact costs inevitably become entangled with adaptation costs and benefits, so while this chapter focuses predominantly on impact costs, adaptation benefits cannot be ignored, although adaptation is discussed in much greater depth in Chapter 4. The key advances in assessing the costs of climate change to agriculture and, hence, the benefits of adaptation come from recognising that farmers and agrarian societies are constantly adapting to changing policy, price and climatic conditions. Thus, models that reflect how these actions interact and translate into a flow of economic benefits over time capture the economic costs of impacts. If productivity declines, then ultimately the value of capital assets, particularly agricultural land, could be reduced. This is the basis of the so-called Ricardian approach, whose proponents argue that variation in capital values better reflect the economic costs of climate change and incorporate adaptation actions by farmers. Alternatively, market simulation research proceeds on the basis that each farmer makes decisions on the basis of profit and yield and will freely switch between crops, given changing suitability of their resources to a changing climate. Research based on these approaches predicts that farmers will adapt and hence climatic change will have less impact than agronomic models predict. Adams et al. (1999) project small overall negative impacts on US agriculture when they consider switching between crops, but where there are opportunities to switch to tomatoes, citrus fruits and other heat-tolerant farming activities, crop yields may actually improve.
Evidence from the Ricardian approach is derived from the use of cross-sectional analysis to isolate the impact of climate regime in determining agricultural profitability. The proxy taken of profitability in this approach is that of land values which reflect the underlying Ricardian rent available from such assets. This approach was first utilised to examine impacts in the United States and has subsequently been applied in the cases of India and Brazil (see Mendelsohn and Dinar, 1999; Mendelsohn et al., 2000). All these countries are large and have diverse climatic zones, enabling the researchers in effect to examine the impact of climate change by spatial analogy. This approach explains adaptation by examining how farmers have adapted in the present day, so may be limited in terms of its applicability to worst-case scenarios, where climate changes more than expected. Nevertheless, results show that impacts of projected future climate scenarios are negative, but smaller than those under agronomic approaches. For India, for example, 2°C warming would reduce net income by around 4%, while even a 3.5°C warming (at the extreme of predicted ranges) would result in loss of net income in the range 15-20% (Mendelsohn and Dinar, 1999).
It is argued that agronomic approaches systematically understate the extent to which adaptation can occur by focussing only on crops, while Ricardian approaches to estimating climate change costs represent adaptation better because they capture full adaptation possibilities as well as the option to switch from agriculture to other land-uses. The differences between the approaches represent estimates of the benefits of adaptation. But Ricardian analyses do not fully reflect adaptation in all forms of agriculture for various reasons. First, land and other factor prices are subject to externalities and policy distortions - the Ricardian approach assumes long run equilibrium in factor markets. Second, land markets do not exist for those important farming systems in marginal agro-ecological zones, including subsistence farming in developing countries (see Hanemann, 2000; Kandlikar and Risbey, 2000). This problem may be overcome to an extent by examining net farm revenues as the measure of value of agricultural activities (given that land values in Ricardian analysis are the discounted stream of net future revenues). Kurukulasuriya and Ajwad (2006) implement such an analysis for the impacts of climate change on Sri Lanka and find significant negative potential impacts in particular regions (losses in potential revenue of up to 67% at the extreme). Adaptation in agriculture is discussed in detail in the following chapter.
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