Application of the Ricardian Technique to Estimate the Impact of Climate Change on Smallholder Farming in Sri Lanka

This study applies the Ricardian technique to estimate the effect of climate change on the smallholder agriculture sector in Sri Lanka. The main contribution of the paper is the use of household-level data to analyze long-term climate impacts on farm profitability. Household-level data allows us to control for a host of factors such as human and physical capital available to farmers as well as adaptation mechanisms at the farm level. We find that non-climate variables explain about half the variation in net revenues. However, our results suggest that climate change will have a significant impact on smallholder profitability. In particular, reductions in precipitation during key agricultural months can be devastating. At the national level, a change in net revenues of between −23% and +22% is likely depending on the climate change scenario simulated. These impacts will vary considerably across geographic areas from losses of 67% to gains that more than double current net revenues. The largest adverse impacts are anticipated in the dry zones of the North Central region and the dry zones of the South Eastern regions of Sri Lanka. On the other hand, the intermediate and wet zones are likely to benefit, mostly due to the predicted increase in rainfall.