AGRICULTURAL

AND
FOREST
METEOROLOGY

ELSEVIER

Agricultural and Forest Meteorology 80 (I 996) 67-85

Methodological issues in assessing potential

impacts of climate change on agriculture
John M. Antle
Depurtment

ofAgriculturul

Economics,

Montunu

State Unioersity,

Bo~emun, MT597/7-0292,

USA

Received 26 December 1994; accepted 21 September I995

Abstract
The purpose of this paper is to discuss how recent developments in the agricultural economics
literature could be utilized to advance our understanding of climate change impact and of the
potential for adaptation to climate change. The paper begins with a discussion of the economic
meaning of impact and adaptation. Noting that analyses of impacts have focused on economic
variables such as farm income or value of farm assets, we describe a modeling approach that
allows environmental
indicators, such as the productivity or value of the ecosystem and its
components,
to be included in impact assessments.
The approach is based on a model of
farm-level decisionmaking that represents land-use and crop-specific management decisions, as a
function of the spatial heterogeneity of the physical environment, technology, prices of outputs
and inputs, and policy variables. Using this model, it is then possible to discuss a number of key
issues that arise in modeling impacts of and adaptation to climate change. These issues include the
effect of choosing a modeling scale or level of data aggregation; technological innovation and
adoption; and changes in economic or environmental policies.

1. Introduction

If indeed human activity induces significant climate change during the next century,
humanity will have to adapt to it, and this adaptation will be most critical where
biological processes are involved, as in agricultural production. As the comprehensive
review of the literature by Easterling (1996) (in this issue) shows, a variety of models
and methods have been employed in attempts to assess the impacts of climate change on
agriculture. Significant progress has been made in conceptualizing
the problem, and
preliminary
regional and global estimates of impact have been made. Yet as the
Easterling review makes clear, and as the work by Mendelsohn et al. (1996) (in this
issue) also emphasizes,
the studies conducted thus far have not been able to fully
account for the potential for adaptation to climate change.
0 16%1923/96/$ IS.000 1996 Elsevier Science B.V. All rights reserved
SSDI 0168.1923(95)02317-S

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The purpose of this paper is to discuss how recent developments

in the agricultural
production
economics literature could be utilized to advance our understanding
of
climate change impact and of the potential for adaptation to climate change. The paper
begins with a discussion of the economic meaning of impact and adaptation. Noting that
analyses of impacts have focused on economic variables such as farm income or value
of farm assets, we describe a modeling approach that allows environmental
indicators,
such as the productivity or value of the ecosystem and its components, to be included in
impact assessments. The approach is based on a model of farm-level decisionmaking
that represents land-use and crop-specific management
decisions, as a function of the
spatial heterogeneity
of the physical environment,
technology, prices of outputs and
inputs, and policy variables. Using this model, it is then possible to discuss a number of
key issues that arise in modeling impacts of and adaptation to climate change. These
issues include the effect of choosing a modeling scale or level of data aggregation;
technological
innovation
and adoption; and changes in economic or environmental
policies.

2. The economic

and environmental

meaning

of impact and adaptation

Before embarking on a discussion of modeling impact and adaptation, it is important

to define what these terms mean. In the literature surveyed by Easterling ( 1996), and in
the work by Mendelsohn et al. (1994), it is clear that the impacts of climate change are
defined as changes in the quantity or net value of production or as changes in an asset
value such as farmland. Thus, impacts are narrowly defined as changes in the value of
marketed products produced by agriculture, or by changes in the market value of farm
assets.
More generally, of course, we know that environmental
change will cause changes in
a broader array of natural assets that have value in the production of market goods and
in the production of nonmarket goods. Examples of nonmarket goods are the value of
natural assets such as clean air and water in sustaining life; the future, but as yet
unrealized, market and human health value of certain species and of biodiversity; and
the value people attach to environmental
amenities.
For sake of argument, we can describe climate and other environmental
changes as
having economic, environmental
and human health impacts within a human population
and a geographical
region. According
to conventional
ex ante impact assessment
methods used by economists, we can assess the impact of climate change as follows:
First, we estimate the present and future values associated economic, environmental.
and
health indicators under the present climate, and construct a suitable summary statistic of
these values, say W( eo), where eO represents the parameters that define the current
climate conditions. The function W(e) typically is the present discounted value of
present and future changes in economic, environmental,
and health values associated
with climate change. Second, we estimate a comparable
measure of value under a
changed climate, say W(e,). The impact of climate change can then be measured as
AW = W( e,) - W( e,). There are several aspects of this impact assessment methodology

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that need to be mentioned with regard to the assessment of climate change impacts. (For
an overview of impact assessment methods, see Davis et al., 1987; Lee et al., 1992).
If the impact is positive, people do not have an incentive to attempt to offset or
mitigate the effects of climate change. But when the impact is negative, there is an
incentive to respond to changing climatic conditions.
Therefore, we cannot assess
impacts holding constant the factors that respond to climate change. Specifically, there
may be adaptation by non-human
species to climate change, either evolutionary
or
nonevolutionary,
depending on organisms and time scales involved. And there may be
adaptation by humans, both in terms of technologies employed in production, in location
of production and other activities, and in institutional arrangements and policies that set
the rules of the game for human behavior. Thus, let the scalar function (Y(e) represent
such factors, so that human welfare is a function W(e, a(e)). The total impact of
climate change is then AW = (aW/ih) + (aW/&x)(da/de)Ae.
This equation has a
straightforward
interpretation:
the first term represents the impacts of climate change,
holding constant the underlying structure of the systems involved (human and nonhuman); the second term represents the impacts of climate change associated with
adaptation induced by climate change.
Another important factor in impact assessment is the choice of a unit of analysis. In
biological terms, climate change may have impacts at a very small spatial scale. We
know, for example, that agricultural production is highly location-specific
and sensitive
to microclimatic variation, and this is generally true for most if not all species. Defining
climate e; in relation to a spatially referenced physical unit i = 1,. . . ,n, we can then
define impacts AW, accordingly.
Because each microclimate
may have a unique
response to global change, it follows that some location-specific
impacts may be positive
and others may be negative. Furthermore,
the algebraic sign of the regional impact,
AW = E,AW,, can be determined
only by knowing all of the AWi whenever all
individual impacts are not of the same algebraic sign. In economic language, the
aggregate impacts are generally different than the disaggregate impacts. In biological
terms, the distribution of impacts within an ecosystem may be important for assessment
of the impact of climate change on characteristics such as biodiversity. The distribution
of impacts within human populations play an important role in human welfare as well as
in public policy formation.
3. Modeling agriculture-environment

interactions

The preceding discussion leads to several implications for measuring climate change
impact. First, we need to be concerned, in principle, with not only economic impacts
that are realized in markets but more generally with the nonmarket impacts associated
with environmental
change, and therefore modeling work needs to be able to account for
the environmental
impacts of human activity. Second, in assessing impact, we must
account for changes in the underlying structure of biological and economic systems, that
is, we must account for adaptation. Third, we must recognize that because of spatial and
temporal variability, disaggregate impacts are generally different than aggregate impacts.
Modeling work needs to account for the effects that such spatial and temporal variability
may have on the measurement of impacts.

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This section describes recent research on modeling agricultural production decisionmaking on a location-specific
basis (e.g. Just and Antle, 1990; Opaluch and Segerson,
1991; Antle and Just, 1992; Antle et al., 1994; Antle et al., 1996). The motivation for the
development of this approach was the recognition that it was not possible to conduct
environmental
impact analysis with the regional or national units of analysis typically
used by economists.
Whereas economists
use aggregate constructs such as market
supply and demand, analogous constructs are not used in the physical and biological
sciences. For example, economists typically use equations representing the regional or
national demand for pesticides to estimate how pesticide use would change in response
to, say, a price change. But from the soil science perspective, it would not make sense to
use an average soil to predict leaching of a pesticide into ground water at a regional or
national scale. Rather, soil scientists would disaggregate the study area into units of
analysis with recognized soil types and other geophysical characteristics,
and estimate
leaching for each of these units. The approach described here would be to disaggregate
the economic analysis in a manner compatible with the soil science analysis, estimate
economic and environmental
impacts at that disaggregate scale of analysis, and then
aggregate impacts to the regional or national level needed for policy analysis.
In the analysis of agriculture-environment
interactions, climate determines the spatial
and temporal distributions
of temperature,
precipitation
and related phenomena
that
affect both crop production
and the physical processes that determine agricultures
environmental
impact. When climate is stable, the historical records of temperature and
precipitation can be interpreted as realizations of stationary stochastic processes whose
parameters can be estimated with historical data. But when climate is changing these
distributions become nonstationary,
e.g. as in the case where the mean annual temperature is rising and mean precipitation
is declining. Such climate changes caused by
accumulation
of greenhouse gases are believed to be at such a slow pace that farmers
would have difficulty perceiving them-indeed,
these small year-to-year changes would
be of little or no consequence
relative to the normal variation in temperature and
precipitation.
Nevertheless,
over a long period of time-30,
50 or 100 years-these
changes could be substantial enough to alter crop productivity and the spatial location of
agriculture in ways that are significant at the regional or national scale.
3.1. A static spatial model of land-use and crop choice
Thus, we begin with a description of an approach to analysis of production management on a location-specific
basis. using a unit of measurement
that is relevant to the
location-specific
decision making of a farmer and also suitable for physical and
biological science research. A simplified, static version of this approach is presented in
Fig. 1. At the top of the figure, three groups of parameters are defined: physical/biological (soil type, climate, pest populations),
economic (output and input prices, and
economic policies), and technological (production technology and capital stock utilized
in production).
Given these parameters,
farmers make land use and crop choice
decisions on each unit of land under their management according to a criterion such as
expected profitability. Then, conditional on the land use and crop choice decision, the
farmer makes other management decisions (seeding rates, fertilizer use, pesticide use,

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cultivation practices). These decisions result in economic outcomes (a crop output and a
realized profit) and environmental
outcomes (soil and water quality on the farm, surface
and ground water quality off the farm, species on and off the farm).
To illustrate the analysis of land use decisionmaking,
consider a situation where a
single crop is produced on a unit of land with the production function F(vi, zi, e,>,
where vi is a vector of variable inputs (fertilizers, pesticides), zi is a vector of fixed
inputs (machinery),
ei is a vector representing the physical environment
at location i
(soil type, climate). If this production process is not used, the unit of land is put into a
conserving use which returns a value ci to the farmer (e.g. the land is returned to natural
vegetative cover, and ci could correspond to a government payment for land conservation, such as a Conservation
Reserve Program payment; or it could be the value of
grazing or recreational use). When production takes place, the maximum expected profit
obtainable with crop price p, and variable input price vector w is given by the profit
definition
of the profit function, see
function 7re(p, w, zi, e,> (for mathematical
Silberberg, 1990). Define ai = 1 if a farmer produces on acre i with technique j in year
t, and 6, = 0 otherwise. Farmers allocate the A acres of arable land in the region
according to its highest valued use, hence, crop production occurs on each land unit
where 7~~> ci, otherwise the land is put into the conserving use. Thus, farmers make
land-use decisions to solve:
mfx{S,7r(p,

w,zi,ei)

+(l

-&)ci}

For simplicity, we assume the choice of conserving use can be made each growing
season. In cases where the conserving use is a long-term decision (e.g. tree planting), the
decision problem involves comparing the present discounted value of profits over the
planning horizon to the value of the conserving use. The land-use decision is represented
by a step function of the form Si( p, w, zi, ei, ci). The acreage allocation to crop
production in the region is C,S,( p, w, zi, ei, c,>, and to conserving uses is A - CiGi(p,
W, Zi, ei, ci>.
When production takes place, profit-maximizing
variable input decisions are obtained
by deriving input demand functions. According to the result known as Hotellings lema,
the profit-maximizing
input use is given by
ui* = -&r(

p, w, zi, e,)/aw

These input decisions and the other management

activities of the production process
lead to location-specific
economic outcomes (a realized output and profit), and environmental outcomes (e.g. soil erosion, chemical leaching, changes in soil organic matter).
If the unit of land is put into the conserving use, there are corresponding environmental outcomes, but the crop production process does not generate economic outcomes. As
the dashed lines in Fig. 1 indicate, there may be feedbacks in both the economic and
environmental
dimensions
into the next periods decisions and outcomes. Economic
outcomes may affect the farmers investment in technology and capital; environmental
outcomes may affect the biological and physical parameters on the unit of land, and may
also result in biological and physical changes in the ecosystem through processes such
as soil erosion, chemical runoff, and leaching. A dynamic model is needed to appropriately account for these processes.

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3.2. Dynamics

of managed

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ecosystems

The preceding
discussion
of technology
choice and productivity
used a static
representation
in which both physical capital and environmental
factors are taken as
given. But in most farming systems, and more generally in managed ecosystems, there
are important feedback mechanisms from economic activities to the environment. While
a static representation may be useful for some purposes, it is clearly not appropriate for
obtaining an understanding
of long-term sustainability and the effects of climate change.
These interactions are particularly important in situations in which production systems
and ecosystems are being stressed, due either to the use of unsustainable
production
systems or to climate change. And as noted earlier, we can construe climate change as
causing distributions of weather events to be nonstationary stochastic processes, but with
the changes in these distributions occurring slowly over long periods of time. Thus we

Fig.

1.A static spatial model of land use and crop management

decisionmaking.

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must necessarily be concerned with behavior over long periods of time when feedback
mechanisms are likely to play an important role in the behavior of the system.
A key aspect of the long-term impacts of agricultural activity on the environment
is
the spatial and temporal pattern of land use. Moreover, as Mendelsohn et al. (1994)
emphasize, changes in land use are likely to play an important role in determining the
economic impacts of climate change. The preceding discussion showed how land-use
decisions play a central role in the analysis of interactions between production agriculture and the environment.
To represent the evolution of the production system over time, we can index variables
using time subscripts; the choice of time step will generally depend upon the context of
the analysis (e.g. 1 h or day for some physical processes, 1 year or more for some
economic processes). The physical capital stock changes over time according to the
equation of motion zit+, = g(zi,, nit>, where ni, is investment
in period r. The
ecosystem evolves over time according to ei, + , = hi,(eit, vijr, zij,>, where the time
subscript on the function denotes the dependence
of climate at each location on
exogenous factors such as radiative forcing from greenhouse gas accumulation.
This
latter function can be interpreted as representing an ecosystem model in stylized form,
such as the Century model used to simulate soil organic matter content (Parton et al.,
1987).
Using these equations of motion as constraints, farmers behavior can be modeled in
a variety of ways. If farmers are economically
rational but do not have incentives to
account for the impacts of their behavior on the ecosystem,
then profit or utility
maximization
may be the appropriate model, with environmental
variables viewed by
farmers as constraints.
But if farmers recognize the impacts of their management
decisions on the environment,
and if they recognize that environmental
changes may
have an impact on their productivity in the long run, their behavior may be represented
as the solution to a maximization
problem that takes account of the dynamics of the
ecosystem. This type of dynamic model can also be used to solve for socially optimal
policies, by incorporating
into the objective function the value of the ecosystem
variables along with the farmers profit.

3.3. Impact analysis

This model of land-use and crop production could be used to conduct a locationspecific analysis of the impacts of climate change that would include both economic and
environmental
effects of climate change, taking as given the production technology of
the farmer, the farm capital stock, and prices of inputs and output. This assessment is
conducted by imposing a change on the system by varying the elements of the vector ei
and inferring the changes in land use, production management decisions. These changes
in land-use and management decisions would in turn generate changes in both environmental and economic outcomes. The impact assessment would be completed by valuing
these changes in terms of a common unit of measurement (typically, in monetary terms),
and constructing
a location-specific
measure of impact AWi(p, w, ci, ey, e,f, zi) =
AWiC p, W, ci, ef, Zi) - AW;(p,

W, ci, e?, Zi).

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Several features of this modeling approach distinguish it from those in the literature
discussed by Easterling (1996). First, because the decision model explicitly allows for
land-use decisions, it begins to incorporate possible economic adaptation to climate
change through changes in land use. That is, if climate change altered crop productivity,
there could be a change in production patterns, with some land going out of production
and other land coming into production. Second, because the approach allows locationspecific land use and production
management
decisions, it is possible to link the
economic models to physical process models and biological models for integrated
impact assessments.
A third feature of this approach is that it shows explicitly that the impact of climate
change is a ,function of the prevailing prices, policy parameters, capital stock, and
technology. But these variables themselves will surely change over the long time periods
involved with climate change, and may themselves be functions of climate change. It
follows from the discussion of the preceding section, therefore, that such economic or
technological adaptations must also be accounted for. The following section focuses on
the crucial issue of technological adaptation.

4. Modeling

long-term

trends in technology

and productivity

The analysis of the impacts of global climate change on agriculture can be decomposed into two parts. First is the assessment of the impacts of climate change on
agricultural resource use and production, for given technologies and institutions. This
type of assessment requires substantial research to generate needed data, but the methods
required to answer them are well developed and the subject of continuing research such
as that described by Easterling (1996).
A more challenging task is to predict how agricultural technologies and institutions
may evolve over the next 30, 60, or 100 years. Existing productivity
research, for
example, has focused primarily on explaining historical data, and so provides little
guidance on how to analyze and predict future productivity
(for a review of these
methods, see Capalbo and Antle, 1988). Consequently,
studies of climate change
impacts have relied on expert opinion or extrapolation of historical trends. The Rosenzweig and Parry (1994) study reviewed by Easterling
(1996) was based on the
assumption that world cereal yields would grow on an annual trend until the year 2060
at 0.9% in developing countries and 0.6% in the developed countries. Combined with
their assumptions of population growth and aggregate income growth, this technology
assumption explains their base scenario result that without climate change real cereal
prices would increase by more than 120% to 2060. This prediction contrasts with the
downward trend in real cereal prices seen for the past half-century, and also differs from
other long-term price forecasts made by USDA (1994) and IFPRI (Agcaoili
and
Rosegrant, 1994) based on extrapolation of historical productivity growth into the future.
As Ruttan (1991) noted, the existing studies of climate change impacts fail to make
use of what we know about the determinants
of agricultural
research investment,
technology adoption, and induced innovation. Another criticism of the literature is that
the existing studies, based on a production-function
approach, underestimate technologi-

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cal and economic adaptation and thus overestimate climate change impacts. Mendelsohn
et al. (1994) propose a Ricardian approach based on estimation of a reduced-form
relationship between asset values and environmental
characteristics. As we shall discuss
in greater detail below, the disadvantage of this approach is that it provides information
on land values but does not provide information on agricultural production. Moreover,
being based on a reduced form estimated with historical data, it cannot be used to
analyze how structural changes, such as the adaptive potential of new types of
agricultural innovations or policy changes, would alter climate change impacts.
In this section, I review some the literature on agricultural innovation and discuss
how the insights of that literature could be used to construct a model of endogenous
technology
and endogenous
land use and crop choice that could better represent
agricultural innovation and adaptation. This model could be estimated with historical
data, and then coupled with regional simulation models to generate predictions of
agricultural impacts that are consistent with what we know about the environmental
and
economic factors influencing agricultural innovation, land use, and crop choices.
4.1. The supply of and demand for innovations
There are extensive
literatures
on various aspects of agricultural
research and
development
(see, e.g. Huffman and Evenson,
1993). It is useful to think of the
agricultural innovation process as a market, wherein farmers are the demanders in this
market, and both private and public organizations are the suppliers. This market consists
of the derived demand for innovations that reflects farmers objectives and the publics
demand for food and other agricultural
products, subject to the various constraints
placed on the process by factors such as physical location, climate, and government
policies. The supply side of the market for innovations represents the public and private
institutions that participate in the development and dissemination of agricultural technology.
The market for innovations
shows how technological
aspects of adaptation are
integrated with economic aspects. The innovation process is interpreted as a sequence of
market equilibria. The relative price of an innovation is seen as changing in response to
a wide variety of factors that impact the agents who participate in the market for
innovations. The induced innovation theory (see Hayami and Ruttan, 1985), in which
innovations are hypothesized to be induced by resource scarcity, is compatible with this
approach, as it is premised on the assumption that both public and private research
organizations perceive and respond to resource scarcity in making decisions about what
technologies to develop.
There are three sets of issues raised by climate change that arise in the analysis of the
supply of innovations: uncertainty about regional changes; the characteristics of technology that become more valuable with climate change; and the rate of change. These three
issues are closely linked in the analysis of adaptation to climate change. Using the
market for innovations,
we can organize the factors that may thus affect technological
adaptation.
The uncertainty issue arises because climate change alters the basic constraints of the
innovation problem. In the conventional
innovation problem, resource and climate are

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taken as a given for a region, and the research task is to develop technology suitable to
the resource scarcities created by the regions endowment.
In this setting, weather is
unpredictable,
but climate can be viewed as a stationary stochastic process. Thus, the
research managers can utilize historical data to assess the climatic component of the
regions resource endowment with a high degree of reliability.
With global climate change, a critical component of the endowment can no longer be
taken as a given. Moreover, climate can no longer be described as a stationary stochastic
process. This creates a serious new problem for researchers. What kinds of research
should be undertaken-what
plant or animal characteristics are desirable-given
some
degree of uncertainty about the future climatic endowment of a region? For example,
will average warming or greater variability
in temperature occur in a region? Will
precipitation increase or decrease? Clearly, a critical issue is how research organizations
will interpret climate predictions and integrate them into their attempts to match the
supply of technology with the likely future demands by farmers who are responding to
evolving climatic conditions.
Much has been learned about how institutions manage the innovation process that is
relevant to adaptation. Binswanger (19781, for example, models the decisions of research
administrators
much like the investment decisions of a cost-minimizing
firm. Thus,
perceptions of resource scarcity and relative prices enter the research and development
process, both through the administrative
decisions in public sector research and within
the private sector. The response of the supply side to either anticipated or real changes in
climate will depend on the institutional arrangements and on the organizations involved
in the creation of science and technology.
As participants
in the market for innovations,
research organizations
must form
expectations for the future. According to the induced innovation hypothesis, research
organizations
respond to perceptions of resource scarcity. A key question in forming
expectations is the length of the planning horizon and the amount of time required to
develop a new innovation in response to a perceived change in resource scarcity. We
know that new innovations
generally take IO-15 years to develop. Will perceptible
changes in regional climates occur over shorter or longer periods of time? If climate
change evolves slower than the usual innovation
cycle, and if the changes are not
extreme, then it is conceivable that the changes may not be any different than what
would normally occur in response to changes in technology, population, and policy
settings. Indeed, it is quite possible that the effects of gradual climate change would be
swamped by other factors.
On the demand side, the key actor is the farm firm who is the demander and user of
technology. The ability and willingness to adopt technology will depend on its potential
profitability or other desirable attributes, which in turn depend on the farmers ability to
use the technology and the incentives to use it created by the economic and policy
environment
in which the farmer operates. All of these factors will play a role in
adaptation, as they will influence the adoption of technologies that become available.
A key question for farmers, and for their behavior, is how climate changes will
impact their economic well being. This will affect their willingness and ability to invest
in technology, and it will affect their demands for policies to protect their economic
interests. Without specifics on the nature of climate change and how it may impact

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biological processes in particular locations, it is difficult to predict how farmers may

respond. If there were an increase in weather variability, we could predict that they
would attach a higher premium on technologies,
management
strategies, and policies
that reduce the effects of climate risk. This could involve adaptation of plants and
animals to the climate; it could involve a portfolio diversification
strategy on the part of
farm managers; and it could lead farmers to act in the political arena to lobby for crop
insurance or other policies that would compensate them for increased uncertainty.
Farmers demands for innovations
are derived from the market demand for their
products. This is the linkage from the farm-level demand for innovations to the local,
domestic, and international
agricultural markets. Population growth and growth in per
capita income will play a key role. Location-specific
demands for innovations will be
driven by the operation of these markets. Thus, it will be essential to understand the
behavior of aggregate demand for food and other agricultural products.
4.2. Modeling

technology

choice at the farm level

Following Antle (1995), a modified version of the model of Mundlak (1988) of a

firms choice of technique
provides a characterization
of the firms demand for
technology. Let the existing state of technology at time t be defined as the collection of
all possible techniques
T, = {F,,( vjr, zjl, ei,)lTK,},
where Fj,(vjl,
zjr, e,,) is the
production function associated with the jth technique, vjl is a vector of variable inputs
used with the jth technique, zjt is a vector of fixed inputs subject to the constraint
Cjzjl = z,, and ei, is a vector representing the physical environment
at location i in
which production takes place at time t.
This representation augments Mundlaks model in two ways. First, the technology set
T, is a function of the stock of technological
knowledge. Second, the environmental
variable ei, is added to the production
function to represent the location-specific
genotype-environment
interaction typical of agricultural production processes. Note that
ei, could represent any location-specific
factor affecting productivity, such as access to
transportation infrastructure.
Mundlak shows that, in a simple static profit maximization problem with factor prices
w, and output prices pt, the solution takes the form vj,tpp,, w,, ei,, z,, T,) 2 0 and
zj$pr, wI, ei,, z,, 7,) 2 0 where the inequality holds for the most profitable technology.
It follows that the implemented
technology can be defined as ZT(p,, w,, e,,, z,, T,>
e ) f 0, Fj, E T,}. Thus, the implemented technology
=
is a function of product and factor prices, the local physical environment,
the physical
capital stock, and the available technologies.
(Fj,(vj,?

Zjt?

4.3. Modeling

ei,)lFj,(vj;

Zi;,

if

innovation

The supply of agricultural innovations has been the subject of extensive research. The
stylized model of Antle (1988) of the innovation process illustrates how the supply of
innovations could be modeled. Following the characterization
by Evenson (1988) of the
stages of the technology development process, the stock of basic scientific knowledge,
K,, evolves according to the equation K,, , = 6, K, + k, + K,, where 6, is a depreciation
rate reflecting knowledge obsolescence,
k, is systematic investment in basic research,

78

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80 (1996) 67-85

and K, is a random term representing

scientific advance that is not the result of
purposeful investment.
Evenson (1988) describes several steps that are typically involved in the transformation of basic knowledge into implementable technologies. Let the result of those steps be
described as the stock of technological knowledge TK,. The equation of motion for the
stock of technological knowledge is TK,, , = p,TK, + IK,(R,, K,, pt. wt> + T,, where
p, is a depreciation rate representing the obsolescence of technical knowledge, ZK, is
gross investment in new technical knowledge, and T, is a random term. ZK, is a function
of spending on applied research R,, the stock of basic knowledge K,, and prices pt and
w,. Technological
knowledge is thus a function of the current and past sequences of
research investment, stocks of basic knowledge, and prices.
Induced innovation enters the model through the effects that prices have on the type
of technical knowledge that is developed. We know that research administrators
and
researchers make conscious decisions to orient efforts towards certain areas of science
and certain technologies. The induced innovation theory argues that research is generally
oriented towards products that are expected to have higher output prices, and towards
reducing the use of relatively more expensive inputs. To incorporate this consideration
into the model, the stock of technical knowledge, TK,, can be interpreted as a vector of
knowledge stocks that are specific to the techniques contained in the technology set q.
Combining together the representation of the implemented technology with the model
of investment in technological
knowledge, the implemented
technology is a function
IT., = IT(p, w, R, K, z,, e;,), where the superscript denotes a vector of current and
past variables, e.g. p = (p,, p, _ , , . . . 1. The implemented
technology is a result of
present and past prices, investments in applied research, stocks of basic knowledge, the
physical capital stock, and the environmental
characteristics of the location.
Using these constructs, it is possible to use existing data to model the dynamic
properties of the innovation process. Huffman and Evenson (1993) review the literature
on studies that estimate the lag relationship between research investment and agricultural
productivity; Antle (1988) provides an analysis that accounts for dynamics created by
the induced innovation
process; Chavas and Cox (1992) provide an analysis using
nonparametric
statistical methods. These studies provide a rich literature upon which
models could be built to characterize the agricultural innovation process.
These models could then be coupled with aggregate economic simulation models
under climate change scenarios to generate predictions of the variables driving the
innovation
process-namely
prices and expenditures
on research and development.
Changes in agricultural innovation would in turn feedback into the production process,
modifying patterns of land use and production,
and in turn changing future market
equilibrium prices and production. Presumably, long-term predictions of future production and productivity growth would be more credible than simple linear extrapolations of
past trends or other ad hoc assumptions about productivity growth.
5. Implications

for modeling

impacts

of climate

change

Combining
the elements discussed in the preceding sections, it is possible to
formulate a comprehensive
model and to consider its implications for modeling impacts

J.M. Anrle/Agriculturul

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79

80 (1996) 67-85

of and adaptation to climate change. Following the example described above, we assume
the farmer chooses to produce a crop on a unit of land or place the land in a conserving
use. In this more general model, the farmer managing i = 1,. . . ,f fields makes capital
investment decisions and location-specific
land-use and management decisions to maximize economic returns, subject to prices, government policies, and constraints imposed
by available technology, the available capital stock, and the environment. Letting p, be
a discount factor that puts future monetary values in present terms, the maximization
problem is:
P ,,~~,z~,e~~,T,)+(l-~~,)c~,},

maxtPt('irme(

s,,.*t,=o

i=l,...,f

subject to:
Vi), = are(
Z;jt = Zjr(
Z,=

Pr 7 WI 7 Z,

3 ei,,

r,)/aw,

P, 9 w, > Z, 9 ei, 7 rf)

CjCiZ;jl

Z t+1 =g(z,,

4)

eit + 1 = hit( e;,, jt 9 Zjt)

In addition,
equations

the production

technology

T, evolves

according

to the system

of

TIi I = T( TK,)
TK,,

I =p,TK,+IK,(R,,K,,p,,w,)+7,

K I+ I = 6, K, + k, +

K,

Following previous notation, p, and w, are output and input prices; ci, is the value of
the land in a conserving use, and may be set by government policy; z, is the farms
capital stock; zTjt is the allocation of capital to the ith land unit for production with the
jth technique; ui>, is the vector of variable inputs allocated to the ith land unit and jth
technique; ei, is the vector of environmental
attributes of the ith land unit; T, is the set
of available production techniques
at time t; TK, is technical knowledge,
IK, is
investment in technical knowledge, R, is spending on applied research, and K, is the
stock of basic knowledge.
Generally, the solution to this type of dynamic optimization problem is difficult to
obtain in closed form, and depends on the functional forms specified for the various
relationships. The solution is known to be a function of the parameters of the problem:
the prices of outputs and inputs (and more generally,
price expectations,
as the
investment problem involves making decisions to maximize present and future expected
profits); policy parameters (such as ci,); the parameters of the ecosystem embedded in
the function hi,; and the parameters defining production technology and governing
technological innovation, such as research spending R, and basic knowledge K,.

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5.1. Aggregation

and modeling

uncl Forest Mrteorology

80 (1996) 67-85

scale

The above model characterizes economic and environmental

outcomes at the scale of
the individual land unit, typically a farmers field. Generally, however, information on
climate change impacts are needed at a larger unit of analysis, such as a geographic
region or political unit such as a state or nation. In economics, the problem of adding up
smaller units into larger ones and then analyzing the properties of the larger units is
known as the aggregation problem. In the physical and biological sciences, this is often
referred to as the problem of modeling scale.
We know that at the individual field level we can accurately characterize the farmers
management decisions as a function of physical, economic, and technological variables,
and we can model the environmental
impacts of these management decisions. We can,
thus, accurately assess the impacts of climate change at that level. As we discussed
earlier, the location-specific
impacts can be represented
as a function of the form
AW,,(p,, w,. cilr ei:, ei:, z;,). The aggregate impact for the region composed of
i= I,... ,N land units, at time t, would be CiAWj,(p,,
w,, c;,, ez, et, z;,). Alternatively, production and environmental
data could be aggregated to the regional level, and
an impact analysis could be conducted with the aggregate data. The result would be a
measured impact of the form AlV(p,, w,, C,, E,!, E:, Z,>, where C,, Ef, Ef, and 2,
are the aggregated data for the region (note that prices are not aggregated, the same
prices are assumed to be faced by all farmers in the region). This latter aggregate impact
measure is the type that all of the studies reviewed by Easterling (1996) have used. What
differences
are there between location-specific
impact measures aggregated to the
regional level, and impact measures derived from aggregate data? And which type
should be used to assess climate change impacts?
A first observation concerns the form of the relationships. It should be obvious that,
unless the relationships were linear, it would not be possible for the function c,AkV,,( p,,
Wf, C,,, ei:, e:,, z;,) to be equal to the function AW(p,, w,, C,, Ef, E,!, Z,), a result
established long ago in the economics literature on aggregation.
A deeper question,
however, is whether it is possible to measure aggregate impacts (e.g. the total change in
agricultural output for the region, or the total damages caused by soil erosion) and to
express this total quantity as a function of the aggregate variables (such as total
quantities of inputs used in agricultural production in the region, or average values of
physical variables such as soil depth and precipitation). It can be demonstrated that such
aggregate relationships
can be constructed (Antle, 1988, provides the result for an
aggregate production model). However, the aggregate relationships
are defined for a
given spatial distribution
of the underlying
location-specific
factors that define the
individual land units in the region, such as environmental
characteristics or technological
characteristics of the farm. Therefore, if these spatial distributions change over time, the
aggregate relationships also change.
To illustrate the difficulties that arise in aggregation of agricultural-environmental
impact analysis, consider what would happen if agricultural policy were liberalized and
the existing system of production subsidies and production controls (e.g. the acreage
reduction program and the conservation
reserve program) were eliminated.
These
programs clearly have served to significantly reduce the amount of land in agricultural

J.M. Antlr/

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80 (19961 67-85

81

production
in the United States, and the value of the program benefits have been
capitalized into land values. Elimination of the programs would clearly alter the size and
type of farms in agriculture, and the types of crops they produced and where they are
produced. Generally,
larger, more capital intensive farms would be observed under
policy liberalization,
and production in marginal areas (e.g. low-productivity
dryland
grain production areas in the Great Plains) would be reduced if not eliminated. In other
words, the underlying distribution of farm characteristics
and technologies
would be
changed. Consequently,
the impacts that climate change would have on land use, crop
production, the economic well-being of farmers, and the environment,
would also be
different under policy liberalization.
Under these circumstances, aggregate relationships estimated before policy liberalization took place would not provide accurate predictions of production activities that
would take place after liberalization,
and by the same logic, these aggregate relationships would not provide accurate estimates of climate change impact. However, observe
that the accuracy of location-specific
estimates of production functions and environmental processes are independent of policy, and could be used to estimate climate change
impacts under either policy scenario.

5.1.1. An empirical example of the effects of aggregation in analysis of agriculture-environment interactions

To further illustrate the effects of aggregate, we consider a recent study of a crop
production system in the Ecuadorian Andes (Antle et al., 1996). While this study was
not designed to addresses the effects of climate change, it was designed to address the
effects of spatial heterogeneity
on the measurement
of the environmental
impacts of
agriculture. For this purpose, detailed field-level data and biophysical data were collected for a group of 40 farms distributed in several watersheds ranging from about 2800
to about 3300 m elevation. A detailed economic simulation model was built to represent
the response of farmers to changes in prices and related policy factors, and this
simulation model was integrated with a physical process model that estimates the
leaching of agricultural pesticides below the crop root zone.
Fig. 2 illustrates the simulated effects on the leaching of fungicides used in potato
production, for two different agro-climatic
zones and for the aggregate of the entire
study area. These outcomes are the result of simulating the land-use and pesticide-use
decisions of potato producers under a wide range of possible price policies-policies
that would either tax pesticides and thus limit production and chemical use, or policies
that would subsidize production and thus increase chemical use. The points closest to the
origin in the figure represent the lowest level of production and pesticide use, whereas
points farther from the origin represent higher levels of production and pesticide use. In
the environmentally
vulnerable zone 4 fungicides generally leach more, and changes in
production and pesticide use result in relatively large changes in the distribution of
leaching events-both
the mean and the variance of fungicide mass leached increase as
production increases. In contrast, in zone 2 leaching is relatively low and there is little
change in response to production changes because the soil and climate conditions there
are not conducive to leaching. Consequently,
the aggregate changes for the entire

J.M.

82

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Meteorology

80 (1996)

67-85

1.75

1.5
P
E
4p

1.25

OI
s
p

I=
B
8 0.75
c
.I

0.5

0.25

Aggregate

Zone 2

-A--

zone4

II

1.5

2.5

3
3.5
4
4.5
5
Mean Fungicide Leaching (kg)

5.5

6.5

7.5

Source: Crissman, Antle and Capalbo (1995).

Fig. 2. Aggregation

of environmental

impacts in an Andean case study. Source: Crissman et al. (1995).

watershed-measured
as an average over all the agroclimatic
zones-show
higher
levels of leaching than zone 2 but much lower than zone 4. Moreover, the aggregate
shows some variation in response to the price policy changes, but the aggregate clearly
fails to reflect the low degree of environmental
vulnerability
in zone 2 and the high
degree of vulnerability
in zone 4.
This example provides several important lessons for agricultural-environmental
impact analysis, including attempts to estimate the impacts of climate change. First, any
estimate of impacts based on a representative
farm could substantially
over- or
under-estimate
impacts. In the example presented here, researchers seeking a representative farm probably would have used data from zone 2, and thus would have underestimated the potential for fungicide leaching that existed in zone 4. Second, the example
shows that the aggregate data are likely to understate the variability of impacts that exist
in the population. This problem is particularly important because the social costs of
environmental
impacts are typically associated with the impacts on the most vulnerable
members of the population.
In the context of climate change and agriculture,
it is
generally believed that the greatest adverse impacts of climate change will occur in
regions where production is vulnerable
to increases in temperature or decreases in
precipitation,
and in regions where adaptation is most limited. It is unlikely that
aggregate analyses of the type that have been conducted thus far (see the review by
Easterling, 1996) are capable of adequately representing spatial differences in agricultures vulnerability
to environmental
change.

J.M. Antle/Agricultural

5.2. The Ricardian

ad

Forest Meteorology 80 (1996) 67-85

83

approach

Mendelsohn et al. (1994) propose the Ricardian approach to assess climate change
impacts. Essentially, they observe that land values generally embody the market value of
the lands environmental
attributes. Therefore, by measuring the relationship between
land values and environmental
characteristics, such as temperature and precipitation, it is
possible to predict what the economic effects of climate change might be. The advantage
to this approach, they argue, is that the observed relationship between asset values and
environmental
characteristics
subsumes all of the adaptations to climate that people
make. In contrast, the production function approach requires that scientists estimate
and model adaptation, something they can only do to a limited degree. Moreover, the
studies of climate change impacts do not allow for land use to be adapted to climate
change, and thus are likely to overstate the adverse economic impacts of climate change.
Following the preceding discussions of impact assessment, the Ricardian approach
can be summarized by saying that, holding prices fixed, the value of farm land should be
a function of environmental
characteristics.
If we ignore nonmarket effects of climate
change, so that we can interpret the total impact as the market impact, then the Ricardian
approach is to statistically estimate the relationship W$e,,> using historical data, where
W, is measured as the market value of land, and then use this relationship to estimate the
effects AWi of changing e, in a manner predicted by climate models.
While the Ricardian approach would embody adaptations that some previous studies
have ignored, such as changes in land use, it has limitations of its own. As we noted
above in the discussion of the static spatial model, measuring impact in this way would
be valid only if there were no changes in technology, policy, or any other temporally
varying factors that would affect the land-use and production management decisions of
farmers, or the value of alternative uses of the land. Thus, as we noted in the preceding
discussion of aggregation, if agricultural policy liberalization occurred, we would expect
there to be a major change in land values in the United States. If one estimated the
relationship Wi(ei,) in year t,, and then policy changed in year I,, this relationship
would not provide accurate estimates of the impacts of climate change that occurred in
year t,. The same argument would hold for technological
innovation.
Changes in
technology would alter the relationship between environmental
characteristics and land
values, so it would not be appropriate to use the relationship Wi(ei,) estimated with
historical data to estimate the effects of climate change on land values.
5.3. Policy change and climate change
Two final points are worth noting about policy change and the assessment of impacts
of climate change. First, because climate changes will take place far into the future,
there can be little doubt that there will be significant
changes in economic
and
environmental
policies. The long-term
impacts of these changes can easily be as
significant
as the long-term changes in technology
and productivity.
Observe, for
example, the political changes in the former Soviet states, or the recently passed
international trade agreements to liberalize international trade over the course of the next
lo-15 years.

84

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80 (1996) 67-85

Second, if there is significant global climate change, there can be little doubt that
policy will respond to it in various ways that will impact adaptation. In the context of
the above discussion of innovation, for example, it is very likely that a perceived threat
to world food supplies would be met with a substantial increase in the public funding of
agricultural research. Other policies, such as those that remove large areas of land from
production in the United States, would also be likely to be changed, and so forth. While
our ability to predict what kinds of changes might occur is quite limited, the fact that
policy is likely to change significantly in the long run serves to reinforce the concerns
about the accuracy of impact assessments that do not account for the effects of possible
policy changes.

6. Conclusions
This analysis characterizes agricultural production as a process that varies spatially
and temporally. Modeling efforts that disregard either the spatial or temporal heterogeneity of agriculture will be inaccurate to some degree. Of course, all applied research must
make simplifying assumptions, so we are left with the need for research to consider the
degree to which the simplifying assumptions of economic impact studies may introduce
systematic biases in estimates of the impacts of climate change. The example presented
from a recent study of the environmental
impacts of agriculture does suggest that
aggregate data may substantially understate the mean level as well as the variability in
impacts measured at a smaller scale, and this result should be cause for concern
especially for studies of impacts on those agro-ecosystems
that are most vulnerable to
the potential effects of climate change.
We do not possess the data needed to model biological, economic, or physical
processes on a location-specific
basis for large areas of the Unites States or other parts
of the world. Our analysis suggests that it would be useful, therefore, to conduct regional
studies that are able to assess impacts on a location-specific
basis and compare the
results to aggregate studies that do not rely on location-specific
data. These comparative
studies should provide the basis to determine what modeling scale is needed to provide a
sufficient degree of accuracy for impact assessment. These studies would also provide
climate modelers with information about the degree of resolution that will be needed to
conduct useful impact assessments.

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