Does Crop Insurance Inhibit Climate-Change Technology Adoption?

Abstract

Changing temperatures and precipitation patterns from climate change could be a major risk to crop yields. Producers have technology options for mitigating climate change risk. One technology is Drainage Water Recycling (DWR), which involves diverting subsurface water to ponds where it is stored for later irrigation. Crop insurance could interfere with DWR by providing producers with another option to manage climate-change risk. It is hypothesized there exists a spillover effect from crop insurance, which inhibits climate-change technology adoption. The analysis investigates the DWR investment decision from a producer’s viewpoint using real options analysis. The analysis considers two policy regimes: one where crop insurance is not in effect and one where crop insurance is in effect. In a Poisson jump process, it further considers the insurance effect of producer’s returns jumping when facing a crop disaster. Results indicate crop insurance has a minimal effect on DWR adoption, and in many scenarios, the DWR adoption thresholds are too large for a producer to invest for climate-change mitigation. The benchmark DWR adoption scenario requires a revenue of more than double the conventional revenue of $649 per acre before a producer would consider adopting.