The crucial role of domestic and international market-mediated adaptation to climate change


February 12, 2021

Climate change effects on agricultural yields will be uneven over the world. A few countries, mostly in high latitudes, may experience gains, while most will see average yield decrease.

A new PIM-supported paper, “The crucial role of domestic and international market-mediated adaptation to climate change” by Christophe Gouel and David Laborde estimates how climate change in the agricultural sector will affect the world economy, focusing on the role of production and trade adjustments as margins of adaptation.

The authors develop a quantitative general equilibrium trade model where the representation of land use choice is inspired from modern Ricardian trade models. They use spatially explicit information from the agronomic literature about potential yields before and after climate change for calibration and counterfactual simulations. The results show that the climate-induced yield changes generate large price movements that incentivize adjustments in production and trade. Both production and trade adjustments contribute to reducing welfare losses globally, with production adjustments making the larger contribution.

Adaptation to climate change in agriculture is often synonymous with investments in irrigation infrastructure, development of new crop varieties, or as confirmed by our paper, farm-level decisions regarding planting decisions and adjusting the crop mix to the new climate, which are indisputably important supply-side adjustments. But this paper demonstrates that these adjustments will not prevent the creation of large imbalances in domestic markets, which can only be resolved by large reallocations in international trade. While theses market adaptations depend naturally on the behavior of private agents in a competitive market and thus seem much less prone to the coordination failure we are witnessing on greenhouse gas emissions mitigation, they nevertheless rely significantly on an international trade system allowing very large reallocations of trade flows. Large terms-of-trade effects as predicted by our results may prompt uncooperative trade policies from policy makers to counteract these reallocations. If policies prevent trade adjustments as an avenue for adaptation, welfare losses would likely be worse in the long run. In this context, some of the difficulties related to international coordination that we face for mitigation may also plague adaptation. A rule-based trading system will be needed to enable climate change adaptation, so strengthening the role of the WTO should be viewed as integral to actively pursuing the agenda of the United Nations Framework Convention on Climate Change.”

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