The Impacts of Climate Change on Cropland Allocation, Crop Production, Output Prices and Social Welfare in Israel: A Structural Econometric Framework

Abstract

This paper combines a structural estimation of vegetative-agriculture supply, based on a farmland-allocation model, with a market-level partial equilibrium demand model, to simulate the effects of climate change on agricultural production and food prices. The supply estimation accounts for corner solutions associated with disaggregate land-use data, enabling the treatment of prices as exogenous. The explicit formulation of production and output prices enables linkage to the demand, as well as the exploitation of market-level data so as to assign production interpretation to the estimated coefficients of the land-use model. We use the model to assess climate-change impacts in Israel, where agriculture is protected by import tariffs. We find that the projected climate changes are beneficial to farmers, particularly due to the positive impact of the forecasted large temperature rise on field-crop production. Fruit outputs are projected to decline, and reduce consumer surplus, but to a lower extent than the increase in total agricultural profits. Nearly 20% of the profit rise is attributed to farmers’ adaptation through land reallocation. Adaptation to the projected reduction in precipitation by increasing irrigation is found to be warranted from the farmers’ perspective; however, it is not beneficial to society as a whole. Abolishing import tariffs effectively transfers surpluses from producers to consumers, but the impact of this policy on social welfare becomes positive only under scenarios of large climate change.