1. American Economic Association
Climate Change and Agriculture: The Role of International Trade
Author(s): John Reilly and Neil Hohmann
Source: The American Economic Review, Vol. 83, No. 2, Papers and Proceedings of the
Hundred and Fifth Annual Meeting of the American Economic Association (May, 1993), pp.
306-312
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2117682
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2. THECONTRIBUTIONSOFECONOMICMODELINGTOANALYSIS
OF THECOSTSANDBENEFITSOFSLOWING
GREENHOUSEWARMINGt
ClimateChange and Agriculture:
The Role of InternationalTrade
By JOHN REILLY AND NEIL HOHMANN *
Economicstudiesof the impactof climate
changeon agriculturehavebeen includedin
Louise Arthur (1988), MartinParryet al.
(1988), RichardAdams et al. (1990), and
Sian Mooney and Arthur(1990).A limita-
tion of these effortswas that they focused
on domestic agriculturalimpacts and did
not consider the effects of climate change
on worldproductionandmarkets.The cen-
tral premiseof this paper is that for open
economies the effect of climatechange on
agriculturein anyindividualcountrycannot
be consideredin isolationfrom the rest of
the world. A small-countryargumentcan
justifyan analysislimitedto that countryif
environmentalchangeoccurswhollywithin
the country.Whereeffectsoccursimultane-
ously throughoutthe world, however, the
only way to justifyconsideringa subglobal
regionis to assumethatthe economyof the
region is closed. There are significant
trade-distortingpolicies in agriculture(the
targetof the recentGATTround),butthese
distortratherthanclose off trade.
Following Sally Kane et al. (1992) and
JamesTobeyet al. (1992),this paperinves-
tigates the agriculturaleffects of climate
changerecognizingthat effectswill simulta-
neously occur worldwide. We summarize
this earlier work and find that, based on
new yield estimates,the broadconclusions
of that work are generallysupported.Sec-
tion I of the paper reviewspredictionsof
future climate and atmosphericconditions,
identifyingthe implicationsfor agriculture
in differentareas of the world. Section II
describesthe SWOPSIM(staticworldpol-
icy simulation)model used to evaluatethe
worldwide economic effects of climate
change. Section III reports an economic
sensitivityanalysisof concurrentyieldlosses
in majorgrain-producingregionsconsider-
ing the possibilityof concurrentchangesin
productionpotentialelsewhereintheworld.
SectionIV, takingadvantageof recentwork
by CynthiaRosenzweiget al. (1993),evalu-
ates agriculturalimpactsof climatechange
based on three general circulationmodels
(GCM's).SectionV offerscaveatsandcon-
clusions.
I. ClimatePredictions
Potentialchangesin climateare summa-
rizedelsewhere(J.T. Houghtonet al.,1990).
The forecastedchangessuggestpotentially
enhanced agriculturalproduction in the
northern regions of the Soviet Union,
Canada, and Europe, where agricultural
productionis limitedby cold temperatures
andshortgrowingseasons,andreducedcrop
tDiscussants:WilliamCline, Institutefor Interna-
tional Economics;CharlesKolstad,Universityof Illi-
nois.
*EconomicResearchService,U.S. Departmentof
Agriculture,1301New YorkAvenue,N.W.,Washing-
ton, DC 20005-4788.Reilly is visiting at the Mas-
sachusetts Institute of Technology.The views ex-
pressedin this paperdo not necessarilyrepresentthe
views of the U.S. Departmentof Agricultureor the
MassachusettsInstituteof Technology.We gratefully
acknowledgethe efforts of Sally Kane and James
Tobey who collaboratedon earlierwork.We thank
JohnSullivanand VernonRoningenfor assistancein
settingup the SWOPSIMmodel.Finally,we aregrate-
ful to CynthiaRosenzweigat the GoddardInstituteof
SpaceStudiesand MartinParryof OxfordUniversity
for providingus with resultsfromtheirstudy.Rosen-
zweig, Kane, David Schimmelpfennig,WilliamNord-
haus,and RichardSchmalenseeprovidedusefulcom-
mentson earlierdrafts.Anyerrorsareours.
306

3. VOL.83 NO. 2 ECONOMICMODELINGOFGREENHOUSEWARMING 307
yields in the United States and most
of Europe due to increased drought(see
Tobeyet al., 1992).
It has sometimesbeen observedthat cli-
mate impactsmaybe less severein equato-
rial regions than in temperateregions be-
cause climate models predict temperature
increasesin the tropicson the orderof 2?C
comparedwith4?C-12?Cfortemperateand
polar regions. However, considerationsof
(i) water use, (ii) adaptationpotential,and
(iii) adaptationcapabilityin these regions
alter this conclusion.(For a lengthier dis-
cussionsee Rosenzweig,et al.,1993).Briefly,
the effectsmaybe summarizedas follows:
Water Use.-Precipitation patterns are
poorly predicted but evapotranspiration
(the plant'sdemandfor water) increases
more than proportionallywith tempera-
ture increase. For example, a 2?C in-
crease in alreadywarmregions(tropical
developingcountries)would increasethe
potentialfor droughtstress more than a
2?Cincreasein coolerregions.
AdaptationPotential.-Tropical regionsare
more likelyto be at the limitsof adapta-
tion measures and thus may have less
potential to adapt. Examplesof adapta-
tionsincludeshiftsfromcool-seasoncrops
to crops that performbetter in warmer
climates; shifts from crops sensitive to
droughtstress;choiceof plantingdatesto
avoidhightemperatures,to avoiddrype-
riods of the year, or to obtain multiple
crops during the year; choice of tillage
practices,seedingrates,row spacing,fal-
low periods;andirrigationas appropriate
for moistureavailability.
AdaptationCapability.-Generally,the ca-
pabilityto adaptmaybe less in develop-
ing countries.Poorly developed markets
for crop inputs(fertilizer,seeds, andma-
chinery)or for outputsmaylimitthe abil-
ity of farmersto obtain inputsuseful for
adaptingto climatechangeor to sell ex-
cess productionof crops favored under
new climates. Infrastructureconsidera-
tions includingeducationof farmersand
the existenceof cropexperimentandtest-
ingstationsapdtransportation,cropstor-
age, and crop processing facilities may
limitdetectionof climatechangeand the
identificationof suitableresponses.
An additionalconsiderationfor agricul-
tureis thatatmosphericCO2actsas a plant
fertilizerand increaseswater-useefficiency
in plants. Higher levels of ambient atmo-
sphericCO2 are thereforeexpected to in-
crease yields. The growthresponse to ele-
vatedCO2isgreaterin C3crops(e.g.,wheat,
rice, barley,root crops, and legumes)than
in C4 crops (e.g., corn, sorghum, millet,
sugar cane); however,water-use efficiency
may be greater in C4 crops. Whether the
full effectsof CO2 fertilizationobservedin
experimentalconditionswill be realized in
the open environmentis an issue of debate.
II. SWOPSIMModelStructure
We used the SWOPSIMmodel of world
food markets,developedby VernonRonin-
gen et al. (1991),to simulateeconomicef-
fect of climate change. Discussion of the
model presented here relies heavily on
Roningenet al. The modelcontains20 agri-
culturalcommodities,includingeight crop,
fourmeat/livestock,fourdairy-product,two
protein-meal, and two oil-product cate-
gories. For the purposesof the sensitivity
studyreportedin SectionIII,the modelwas
constructedto identifyseparatelytheUnited
States, Canada,the EuropeanCommunity
(EC),Australia,Argentina,Thailand,China,
Brazil,the formerSovietUnion, other Eu-
ropean countries (Sweden, Finland, Nor-
way,Austria,and Switzerland),Japan,and
ROW(the restof the world).The commod-
ity supplyand demandequationswere set
to reproduce1986base-perioddataforeach
country'ssupply,demand,prices,andtrade.
For the specificGCMscenariosreportedin
Section IV, the model was updated to a
1989 base and reconstructedinto 33 sepa-
rate countries/regionsto facilitateanalysis
by country-incomeclass.
For each country/regioni and commod-
ity j in the model, constant-elasticityde-
mand and supply functions are specified.
For country i and commodityj quantity

4. 308 AEA PAPERSAND PROCEEDINGS MAY1993
demanded(QD)andsupplied(QS)aregiven
as:
n
(1) QDi= dij(1 +sdi)j l CPik
n
(2) QSi1 = sij (1 +SSj)
I
PPgk
whereCPikandPPikaredomesticconsumer
and producer prices of commodity k =
1,...,n. For k=j, the ak and Pk are the
own-price demand and supply elasticities
(uncompensated)and for k Aj they are
cross-priceelasticities.The dij and si, are
base quantitiessdij and ssij are demand-
andsupply-shiftparameters,whichare zero
underthe base data. In the climate-impact
scenarios,percentageyield changesby crop
and country as developed from crop-
responsemodels are used as a measureof
the ssij. Domestic consumerand producer
prices reflect world prices, governmentin-
terventionsin production(PSW1.),andcon-
sumer subsidiesand interventions(CSWij).
These interventionslead prices in any one
countryto differfrom the worldprice and
cause the consumerprice for a countryto
differfrom the producerprice. The price-
linkageequationsare
(3) PPij= ppij + wijWPI.}ij
+ PSWij+ TPij+ NWij
(4) CPij= cpij+ PPij+ CSWij+ PSWij.
The w11are dummies(1 for tradedor 0 for
nontradedcommodities),and NWijare do-
mestic price changes,which are zero when
w11= 1. The ppij andcp11are constantsand
the TP11aretrade(exportandimport)inter-
ventions. The y11 are price-transmission
elasticities and reflect additional govern-
ment interventionsthat limit the transmis-
sion of world price changes to domestic
prices.
Market equilibriumis characterizedby
excess world demandequal to zero for all
commodities.A numericalsolution is ob-
tainedin the modelthroughiteration.Once
a solution is obtained, producerand con-
sumersurpluschangesaremeasuredaswel-
faretrianglesby calculatingthe valueof the
integralof the supplyanddemandfunctions
betweenthe initialprice and the new equi-
libriumprice.We reporteconomiceffectsin
terms of changesin economicwelfarethat
include changes in consumersurplus,pro-
ducer surplus,and changes in government
payments (revenues) that result implicitly
fromthe worldprice-transmissionelasticity
and explicitlyfromother governmentinter-
ventions.As a caveatwe note that SWOP-
SIMis a partial-equilibriummodel.MaryF.
Kokoskiand V. KerrySmith (1987) show
that the climate-changewelfare effects of
fairly large, single-sectorimpactsare ade-
quately measured in a partial-equilibrium
setting.SWOPSIMtreatsresourceandother
inputs implicitly through specification of
supplyparameters.
III. TheSensitivityofAgriculturetoYield
Lossesin MajorGrainProducingRegions
Among the feared effects of climate
changeareconcurrentproductivitylosses in
the major grain-producingregions in the
United States, the plains of Canada, and
the EuropeanCommunity.In this section,
we examinethe economicimpactof signifi-
cantyieldlosses in these areaswhileinclud-
ing varyingassumptionsof how yields may
change outside these areas. We identify
three types of countries: TEMP (United
States,Canada,and the EC), temperatear-
eas where reducedsoil moistureis usually
predictedto lead to yield declines;COLD
(former Soviet Union, northern Europe,
China, Japan, Australia, Argentina, and
Brazil),areas that some evidence suggests
could see increased yields from warming;
and ROW, the rest of the world.We con-
structed three simulation experiments to
considerthe effect of a rangeof simultane-
ous yield reductions in these regions. In
each experiment,SWOPSIMwas simulated
for concurrentyield reductions in region
TEMP of 10, 20, 30, 40, and 50 percent.
Thus,each experimentis a set of fivemodel
simulations.The three experimentswere as

5. VOL.83 NO. 2 ECONOMICMODELINGOFGREENHOUSEWARMING 309
TABLE 1-GLOBAL WELFARELOSSESAND
YIELD CHANGES(MILLIONSOF 1989
U.S.DOLLARS)
Yieldloss Region
in TEMP _ _ _ _ _ _
(percentage) TEMP COLD ROW
Experiment1:
-10 2,052 8,914 4,797
-30 -1,290 7,513 557
- 50 - 7,497 8,531 -3,146
Experiment2:
-10 - 1,588 -1,699 - 2,052
-30 - 7,878 -4,437 -5,436
-50 - 18,595 -5,551 -7,190
Experiment3:
-10 - 2,873 8,061 - 17,749
-30 - 6,294 8,927 - 21,343
- 50 -16,000 12,891 - 28,138
Notes: Region TEMP= temperate areas (United
States,Canada,EC); regionCOLD= cold areas and
othersthatcouldbenefit(formerSovietUnion,north-
ern Europe, China, Japan, Australia, Argentina,
Brazil);regionROW= rest of the world.The experi-
ments were as follows:
Experiment1.-yield increases of 25 percent in COLD,
no changein ROW,withlossesas givenin tablefor
TEMP;
Experiment2.-no yieldchangein COLDor ROW;
Experiment3.-yield increasesof 25 percentin COLD
withyielddecreasesof 25 percentin ROWandwith
lossesas givenin tableforTEMP.
follows:
Experiment1.-Yield increasesof 25 per-
cent in regionCOLD,with no changein
ROW;
Experiment2.-A neutral effect in COLD
and ROW;
Experiment3.-Yield increasesof 25 per-
cent in COLD and decreasesof 25 per-
cent in ROW.
The welfareeffectsresultingfromthe in-
troduction of climate-inducedchanges in
yieldsspecifiedin the threeexperimentsare
showninTable1.Theresultsillustratethree
interestingfeaturesregardingthe impactof
climate change on agriculture.First, even
underthe assumptionof relativelylargeand
negativedomestic,yield effects,the welfare
losses are small relative to GDP for all
countriesidentifiedin the study.Thelargest
impactsmeasuredas percentagesof GDP
were in China and Argentina in experi-
ments 1 and 3 wherenet economicbenefits
rangedbetween 2 and 6 percent of GDP.
For all other countriesin all other experi-
ments, the effects rangedfrom a few hun-
dredths to a few tenths of a percent of
GDP. Agricultureaccountsfor a smallper-
centageof GDP in mosteconomies,particu-
larlylarge developedeconomies(3 percent
in industrialmarketeconomiesand 19 per-
centindevelopingeconomiesin 1986[World
Bank,1988]).
Experiment 1 illustrates that reduced
productionpotential in the United States,
Canada, and the EC may be more than
balancedbygainsin othergeographicareas,
leading to improvementsin worldwelfare.
The experimentsalso demonstratethat the
pattern of welfare effects amongcountries
dependsnot onlyon domesticyieldchanges,
but also on changes in world commodity
pricesandthe relativestrengthof the coun-
try as a net agriculturalimporter or ex-
porter. Consider the case of Argentina
under experiment2 (in which world agri-
cultural commodity prices rise). Because
Argentinais a largenet exporterof agricul-
turalcommodities,the countrygainedover-
all from an increasein the world price of
agriculturalproducts,even without any in-
crease in crop yields. In contrast, Japan
sufferednet welfare losses over all experi-
ments,despiteyield increasesof 25 percent
in experiments 1 and 3. Japan's welfare
losses were very similaras a percentageof
GDP to the EC'sbecauseof Japan'sdepen-
dence on food imports.As would be ex-
pected,consumereffects(e.g.,welfarelosses
whenworldpricesrose)dominatedin deter-
miningthe signof the net welfareeffectfor
most countries.The exceptionswere very
large agriculturalexportersfor which pro-
ducereffectsdominated.Tobeyet al. (1992)
providegreaterdetail.
These discussions highlight the role of
induced price changes in promotinginter-
regional adjustments in production and
consumption.A comparisonof SWOPSIM
resultswith other models that considercli-
mate-changeeffectson a singlecountryfur-

6. 310 AEA PAPERSAND PROCEEDINGS MAY1993
ther demonstratesthe role of global price
changes.Adams et al. (1990) examine the
economicimpactof climatechangeon U.S.
agricultureusing the GoddardInstitute of
SpaceStudies(GISS)andGeophysicalFluid
DynamicsLaboratory(GFDL)climatemod-
els. Theyfindnet welfarereductionsforthe
United Statesunderthe two scenariosto be
about$6billionand$34billion,respectively
(assumingno growthin technologyor de-
mand and no CO2 fertilization effects).
Yield changesin the GISS and GFDL sce-
narioswere on the orderof 20 percentand
40 percent,respectively.
In contrast,the net welfareimpacton the
UnitedStatesin ourexperiments1, 2, and3
under 40 percent U.S. yield losses were
- $0.5 billion, - $3.0 billion, and - $2.7 bil-
lion. In all experiments,net welfareeffects
for the United States are considerably
smaller than those estimated by Adams
et al. (1990). The differentresultsprovide
an illustrationof the importanceof interna-
tional price changes in promotinginterre-
gional adjustmentsin productionand con-
sumption.
IV. ResultsBasedon GCMSimulations
Rosenzweig et al. (1993) have recently
concluded an assessmentof yield changes
for the entire world under three separate
GCM scenarios. The study used equilib-
rium, doubled-trace-gasclimates as pre-
dictedby the GISS,GFDL, andthe United
Kingdom Meteorological Office (UKMO)
GCM's.The climatescenariosdifferamong
these models in terms of the seasonality,
regionality,and overallmagnitudeof tem-
perature and precipitation change. The
changes between the 2x CO2 equilibrium
andthe controlclimatein globalmean sur-
face temperatureand global precipitation
for the models were: GISS, + 4.2?C and
+ 11 percent;GFDL, + 4.0?Cand + 8 per-
cent; UKMO, + 5.2?C and + 15 percent.
The Rosenzweig et al. (1993) study esti-
matedyieldchangesforeachGCMscenario
usingcrop-responsemodelsrunformultiple
sites in 23 countries.They estimatedyields
withandwithoutadaptation,withandwith-
out the yield-enhancementeffect of in-
creasedambientCO2 levels, and three lev-
els of adaptation(none, moderate,and sig-
nificant).We reporthere only resultswith
no adaptation and moderate adaptation.
They combinedthe new crop studies with
existingestimatesfor other regionsto esti-
mateyield changesworldwidefor all crops.
They simulated economic and production
shiftsusingthe "basiclinkedsystem"(BLS)
model developedat the InternationalInsti-
tute for AppliedSystemsAnalysis(IIASA).
The principaladvantageof the SWOP-
SIM model over the BLS model is that
productionand price changes are summa-
rized as changes in welfare. Welfare mea-
suresaremoredirectlyusefulforcomparing
the benefitsof avoidedclimatechangewith
the costs of emissions reductionsand for
considering,forexample,whatlevelof mon-
etary transfersmight be requiredto com-
pensatecountriessufferingparticularlylarge
losses. Ourfindingswere as follows:
(i) Forthe threeGCM'snet globalwelfare
changes without adaptationand with-
out (with)the carbondioxideeffect in
billionsof 1989U.S. dollarswere:GISS,
-$115.5 (-$.1); GFDL, -$148.6
(- $17.0);UKMO, - $248.1 (-$61.2).
That is, under the GISS climate the
positiveeffectsof carbondioxidefertil-
izationoffset all but $0.1billionof the
losses due to climatechangealone.
(ii) For the three GCM's the net global
welfare changeswith the carbondiox-
ide fertilization effect and without
(with) adaptation were: GISS, -$.1
(+$7.0); GFDL, -$17.0 (-$6.1);
UKMO, - $61.2 ( - $37.6). That is, the
adaptationsconsideredwere worth on
the order between $7 billion and $25
billion.Carbondioxidefertilizationwas
worth on the order of between $115
billionand$190billion.
(iii) Even under the GISS GCM climate
with carbon dioxide fertilization and
adaptation,where the net welfare ef-
fect for the world is positive,all three
developing-countryincome-classgroups
sufferedwelfare losses (Table 2). This
resultstemmedfrom a combinationof
effects.Whilecroppricesgenerallyde-

7. VOL.83 NO. 2 ECONOMICMODELINGOFGREENHOUSEWARMING 311
TABLE 2-WELFARE EFFEcrS BY COUNTRY GROUP
(MILLIONS OF 1989U.S. DOLLARS)
GCM
Countrygroup GISS GFDL UKMO
< $500percapita -210 -2,573 -14,588
$500-$2,000percapita -429 -2,927 -10,669
> $2,000 per capita -603 -534 - 1,021
EasternEurope/former
SovietUnion 2,423 - 125 - 4,875
OECD 5,822 25 -6,470
Total: 7,003 -6,135 -37,623
clined in this scenario, creating con-
sumer surplus gains and producer
surplus losses, many of the tropical
regions suffered yield losses that ex-
acerbatedproducerlossesto the extent
that they were larger than consumer
gains.Thiswastruein mostdeveloping
countries.Economiceffectsin develop-
ing-countryareas where average in-
comes are generallyabove $2,000 per
capitaareparticularlyinteresting.Many
of these countriesarelargeagricultural
producersandexporters.Theysuffered
largeproducersurpluslossesunderthe
GISSclimatebecauseworldcropprice
declined, even though in some cases
yields for some crops increased (e.g.,
crop yields increasedin Argentinaex-
cept for wheat). While the GFDL cli-
mate created global net losses, the
developingcountrieswith average in-
comes of more than $2,000per capita
fared better than they did under the
GISS climate because producers in
these countries benefited from rising
worldcropprices.Under the far more
severe UKMO scenario, this country
groupshowedthe smallestincreasein
net losses amongthe groups,againbe-
cause of producergains. The poorest
regionsare largelyfood importersand
thus showverylargeconsumersurplus
losses relative to producergains. The
principalexception to this was China
whichgenerallyshowedyieldgainsand
net surplusgains across all three cli-
mate scenarios.Underthe UKMOsce-
nario,the net gain for Chinawas $3.2
billion. This means that losses for the
rest of the countrieswith averagein-
comesof less than$500percapitawere
$3.2 billion greater,or nearly$18 bil-
lion.
These three conclusionsconfirmthose of
Rosenzweiget al. (1993).In particular,the
disproportionateimpact in the developing
countriesis emphasizedintheirstudy.Trade
can shiftgainersandlosers,but the pattern
of effects is highlydependenton the origi-
nalyieldestimates.In the futurewe planto
compareSWOPSIMresultsdirectlywiththe
BLS results. Such a comparisonwould be
beneficialbecause the BLS models the dy-
namicadjustmentof agriculturein the con-
textof changingpopulationandtechnology.
V. CaveatsandConclusions
Significantsourcesof errorremaindue to
underlyinguncertaintiesin,forexample,the
climatescenarios,agronomicfactorssuchas
competitionfromweeds and plant and ani-
mal disease, and increasedcompetitionfor
landor waterbecauseof increaseddemand
from other sectors due to climate change.
Further,the modelusedin the analysisdoes
not include technologicalchange, popula-
tion growth, or other changes that may
accompanyeconomic growthand develop-
ment. The yield estimatesfrom GCM'sre-
flect conditionsunderequilibriumclimates.
Givencurrentscientificopinionthat a cen-
tral estimateis a warmingof 3?Cfromcur-
rentglobaltemperaturesby about2100,the
40 -5?C increases in Section IV may be un-
likelyuntil 2125 or 2150. Effects occurring
between now and then may be important
for currentdecisions.
With the above caveats, the findingsof
earlierwork,supportedbynew resultsfrom
GCM scenarios suggest the following.
(a) Interregionaladjustmentsin production
and consumptionwill serve to buffer the
severityof climatechangeimpactson world
agricultureandresultin relativelysmallim-
pacts on domestic economies from a dou-
bled CO2 climate. (b) Evaluation of
climate-changewinnersand losers requires
considerationof global marketchanges as

8. 312 AEAPAPERSANDPROCEEDINGS MAY1993
well as domesticyieldeffects.An important
implicationis that the incentivescountries
have to reduce greenhouse-gasemissions
depend on global price changesas well as
country-specificchangesin yield. Following
fromthe yield resultsof Rosenzweiget al.
(1993)andconfirmingtheireconomicanaly-
sis, (c) developing countries appear at a
greaterdisadvantage,and the beneficialef-
fectsof carbondioxidefertilizationarecriti-
cal in limitingthe economicimpacts.
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