A FARMer's View of the Ricardian Approach to Measuring Agricultural Effects of Climatic Change

During the past few years two new methods, each based on the analogous region concept, have been developed to account for farmer adaptation in response to global climatic change. The first, called 'Ricardian' by Mendelsohn, Nordhaus, and Shaw (1994), econometrically estimates the impact of climatic and other variables on the value of farm real estate. Under some conditions, estimates of climate-induced changes in farm real estate capture first-round adaptations by farmers and represent the economic value of climatic change on agriculture. The second method, promulgated by Darwin et al. (1994) in the Future Agricultural Resources Model (FARM), uses a geographic information system to empirically link climatically derived land classes with other inputs and agricultural outputs in an economic model of the world. FARM provides estimates of economic impacts that fully account for all responses by economic agents under global climate change as well as estimates of Ricardian rents. The primary objective of this analysis is to evaluate how well changes in Ricardian rents measure agricultural or other effects of climatic change after all economic agents around the world have responded. Results indicate that changes in Ricardian rents on agricultural land are poor quantitative, but good qualitative, measures of how global climatic change is likely to affect the welfare of agricultural landowners, if one recognizes that increases in Ricardian rents actually indicate losses in landowner welfare and vice versa. Results also indicate that regional changes in Ricardian rents on all land are good qualitative measures of changes in regional welfare. They are poor quantitative welfare measures because they systematically overestimate both benefits and losses and are on average upwardly biased because inflated benefits are larger than exaggerated losses. Results also indicate that, when based on existing land-use patterns, changes in Ricardian rents on all the world's land are poor quantitative and qualitative measures of changes in world welfare. Despite these shortcomings, changes in Ricardian rents can provide useful information when other measures are not available. In this analysis, for example, estimated changes in Ricardian rents on all land indicate that climatic change would likely have detrimental effects in Latin America and Africa, beneficial effects in the former Soviet Union, and either detrimental or beneficial impacts in eastern and northern Europe and western and southern Asia. This is consistent with previous studies showing that climatic change would likely have detrimental, beneficial, and mixed effects on economic welfare in, respectively, equatorial, high latitude, and temperate areas. Estimated changes in Ricardian rents also indicate that aggregating Africa, Latin America, the former Soviet Union, eastern and northern Europe, and western and southern Asia into one region causes FARM's economic model to generate upwardly biased changes in world welfare. Modified results from scenarios with moderately flexible land-use change and which account for current land-use patterns indicate that world welfare may increase if the average surface land temperature does not increase by more than 1.0 or 2.0°C. If the average surface land temperature increases by 3.0°C or more, however, then world welfare may decline.