The role of trade in adaptation to climate change

The role of trade in adaptation to climate change

Christophe Gouel, David Laborde

Given our collective failure to mitigate greenhouse gas emissions, the world will need to adapt to a particular degree of climate change. This might imply that as climate change affects crops’ yield potential, new patterns of comparative advantage, and therefore new trade flows, will emerge. This column examines the need for the marketplace adaptations in mediating welfare losses in the agricultural sector. The findings suggest a big role for international trade: when adjustments in trade flows are constrained, global welfare losses from climate change increase by 76%.

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Curbing greenhouse gas emissions to mitigate climate change has shown to be a hard objective, in large part because international coordination of the mandatory mitigation efforts is quite difficult. Due to this fact, in a recently available special report, the Intergovernmental Panel on Climate Change (IPCC) finds that limiting global warming to only 1.5°C (2.7°F) would require large reductions in emissions and important societal changes, though it remains within the realm of the possible (IPCC 2018).

Given the issue of achieving these changes and the actual fact that past emissions alone will probably cause some warming over the coming decades, adaptation to climate change will be necessary. As noted by Anderson et al. (2018), an upside of adaptation is that it doesn’t depend on international coordination; individual countries, and even economic agents, can undertake adaptation, incentivised by environmental and price changes.

Agriculture is probably the sectors most influenced by climate change, but this impact is quite different between and within countries. Northern regions that now have winter and short growing seasons may reap the benefits of higher yields in a few crops. Tropical regions, facing more extreme temperatures, could see reduced yields (see Figure 1 for the extent of regional variations).

Figure 1 Relative changes because of climate change in potential yields aggregated across crops

Note: Yields from the GAEZ project under scenario SRES A1FI.

But direct predictions from crop scientists usually do not mean final welfare effects because several adaptation mechanisms might take place, mitigating damage. Many of these adaptation mechanisms have already been studied extensively. For instance, crop scientists have proved the adaptive role of changing varieties or planting times (Challinor et al. 2014). Economists have emphasised the role of within-country reallocation of land to crops or other uses more in keeping with the yield beneath the new climate (Mendelsohn et al. 1994).

However, the role of market-mediated adaptation to climate change continues to be poorly understood. For instance, market-mediated adaptation should come from the actual fact that landowners changes their land allocation not merely due to new potential yield but also due to changed prices beneath the new climate, which account themselves for all your adaptation popular, supply, and trade.

Inside our recent study (Gouel and Laborde 2018), we analyse the potential role of market adaptations – both nationally and internationally – in reducing the economic cost of climate change in the agricultural sector. Because we model global agriculture using 11,801 fields, we’re able to assess impacts on individual regions within countries and also the resulting net changes in countries’ agricultural trade.

Our work provides insights on the role of market-mediated adaptation to climate change, with a concentrate on the adaptive role of international trade. To examine this question, we create a quantitative general equilibrium style of trade centred on agricultural products. This model builds on the modelling approach of Costinot et al. (2016) and represents the world using 50 regions (including many individual countries), 35 crops, one livestock sector, and one non-agricultural good. The model includes the next margins of adjustments, all separately parameterised to fully capture crop substitution within-field (11,801 fields in the model, represented at the 1-degree level), intensification of crop production, agricultural product substitution in food demand, crop substitution in livestock-feed demand, price elasticity of demand for the meals bundle, and product substitution between country of origin. The model is calibrated to replicate the marketplace situation in 2011 as the baseline, using information regarding potential yield for every crop and each field beneath the current climate from the GAEZ project (IIASA/FAO 2012). To simulate the result of climate change, we utilize the same way to obtain information from crop scientists and change the crop potential yields to values under a climate change scenario.

This simulated climate change shock delivers three main results about the adaptive role of trade. First, terms-of-trade changes heavily influence welfare effects. Figure 2 decomposes welfare changes into terms-of-trade changes and productivity changes, with the terms-of-trade changes summing to zero at the world level. All regions lose from reduced crop productivity (although a few individual countries may gain), however, many are a lot more than compensated by terms-of-trade gains. Because total food demand is inelastic, the average reduction in crop productivity increase food prices substantially. So, net-food-exporting regions, namely Latin America, Northern America, and Oceania, will benefit, and the responsibility of adjustment to climate change will fall to net-food-importing regions, namely Asia, Europe, and the center East and North Africa.

Figure 2 Welfare decomposition of the result of climate change on agriculture

Second, future patterns of international trade flows in agricultural products may look extremely not the same as current patterns as a result of ramifications of climate change. Figure 3 demonstrates simulated export shares of maize and rice bear little resemblance with their market shares (baseline).

For the maize market, traditional exporters like the US, Brazil, France, and Ukraine suffer large yield reductions and consequentially reduce their exports. Canada, Germany, and China, situated in northern latitudes, have higher maize yields than at baseline. They part of to fill the gap, with the world production of maize even increasing by 19%.

The consequences are similar for rice. The original rice exporters are tropical countries that are severely hit by climate change. Rice production moves north, and new exporters emerge, namely, China, Korea, and Japan. The export shares in the wheat market change less with decreases in a few traditional exporters (Argentina, Australia, France, US) and increases in others, situated in northern latitudes (Canada, Germany, Russia).

Figure 3 Changes because of climate change in the export shares of the major exporters

Third, crop choice and trade adjustment have important mitigating roles in climate change adaptation. To measure the welfare ramifications of market adaptation, we simulate the climate change shock while alternatively holding constant with their baseline values acreage shares and bilateral import shares. Figure 4 implies that these adaptation mechanisms play a big role, reducing global losses by 55% and 43%, respectively. So, change in crop choice is apparently the most important way to obtain adaptation, but trade adjustments also play an integral role.

Figure 4 Welfare results under full adjustment and limited adjustment

Despite large avoided losses allowed by changes in land allocation and in trade structure, lots of the poorest countries will probably bear a much bigger share of the expense of climate change in agriculture than rich countries for several interacting reasons. As much poor countries are tropical, they are generally the worst suffering from climate change with regards to crop productivity. This direct effect is compounded by agriculture’s large share of the economic activity in these countries. Finally, in aggregate, poor countries have a tendency to lose either from the terms-of-trade changes because they’re net food importers (Asia, and the center East and North Africa) or from more limited adaptation through trade due to high trade costs and specialisation in crops with little trade (Sub-Saharan Africa).

Our results carry important policy recommendations, especially with regards to global policy and coordination. As the market adaptations analysed in this work depend naturally on the behaviour of private agents in a competitive market and therefore seem much less susceptible to the coordination failure we are witnessing on greenhouse gas mitigation, they nevertheless rely significantly on a global trade system allowing large reallocations of trade flows. Large terms-of-trade effects as predicted by our results may prompt uncooperative trade policies from policymakers to counteract these reallocations. If policies prevent trade adjustments as an avenue for adaptation, welfare losses may likely be worse over time.

In this context, a few of the difficulties linked to international coordination that people face for greenhouse gas mitigation could also plague adaptation. A rule-based trading system will be had a need to enable climate change adaptation. Strengthening the role of the WTO ought to be considered integral to actively pursuing the UN Framework Convention on Climate Change agenda.

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Challinor, AJ, J Watson, DB Lobell, SM Howden, DR Smith and N Chhetri (2014), “A meta-analysis of crop yield under climate change and adaptation”, Nature Climate Change 4(4): 287-291.

Costinot, A, D Donaldson and CB Smith (2016), “Evolving comparative advantage and the impact of climate change in agricultural markets: Evidence from 1.7 million fields all over the world”, Journal of Political Economy 124(1): 205-248.

Gouel, C, and D Laborde (2018), “The key role of international trade in adaptation to climate change”, NBER Working Paper 25221.

IIASA/FAO (2012), Global Agro-ecological Zones (GAEZ v3.0).

IPCC (2018), Global Warming of just one 1.5°C. An IPCC Special Report on the impacts of global warming of just one 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the risk of climate change, sustainable development, and efforts to eliminate poverty.

Mendelsohn, R, WD Nordhaus and D Shaw (1994), “The impact of global warming on agriculture: A Ricardian analysis”, The American Economic Review 84(4): 753-771.