Climate Change Economics

Climate change may affect the use of pesticides and their associated environmental and human health impacts. This study employs and modifies a partial equilibrium model of the US agricultural sector to examine the effects of alternative regulations of the pesticide and greenhouse gas emission externality. Simulation results indicate that without pesticide externality regulations and low greenhouse gas emission mitigation strategy, climate change benefits from increased agricultural production in the US are more than offset by increased environmental costs. Although the combined regulation of pesticide and greenhouse gas emission externalities increases farmers' production costs, their net income effects are positive because of price adjustments and associated welfare shifts from consumers to producers. The results also show heterogeneous impacts on preferred pest management intensities across major crops. While pesticide externality regulations lead to substantial increases in total water use, climate policies induce the opposite effect.

We examine the relative attractions of a carbon tax, a "pure" cap-and-trade system, and a "hybrid" option (a cap-and-trade system with a price ceiling and/or price floor). We show that the various options are equivalent along more dimensions than often are recognized. In addition, we bring out important dimensions along which the approaches have very different impacts, including some dimensions that have received little attention in prior literature. Although no option dominates the others, a key finding is that exogenous emissions pricing (whether through a carbon tax or through the hybrid option) has a number of important attractions over pure cap and trade. Beyond helping prevent price volatility and reducing expected policy errors in the face of uncertainties, exogenous pricing helps avoid problematic interactions with other climate policies and helps avoid potential wealth transfers to oil-exporting countries.

We analyze the impact of weather shocks on price formation in spot and futures market for food in India where until the recent introduction of commodity futures markets in 2005, the transmission of these shocks to short-term (spot) price movements was unclear. Hitherto, the price discovery mechanism was weak and end price was expected to be different (mostly higher unless some product prices were administered) from the market-clearing price. In addition, this weak mechanism was expected to result in higher price volatility. The introduction of a futures market is expected to reduce risk, a major component in agricultural production as well as in price formation. Though the commodity futures market in India is nascent, we model transmission of weather shocks to futures and spot prices using monthly data. Based on cointegration analysis, our results suggest strong long-run co-movement between futures prices and spot prices for commodities traded in futures markets. Changes in rainfall affect both futures and spot prices with different lags. However, rainfall shocks generate larger responses from futures prices than from spot prices. Although there could be other factors that affect futures prices, after controlling for fuel prices, our results clearly show the transmission mechanism of weather shocks from futures to spot prices. We also explore the changes in responsiveness of prices of major agricultural commodities to rainfall with introduction of futures contracts to facilitate the pass-through of various types of shocks to agricultural commodity prices. Using smooth transition regression, we find that the bivariate relationships between rainfall and prices of rice, wheat and pulses show some nonlinearity with the structural change happening after the introduction of futures market. These relations are found to be much stronger in the post-structural change period that broadly coincides with the introduction of futures market.

The study compared the climate indices and considered the major agricultural climate features, including precipitation, temperature, solar duration, radiation, and uncertainty features such as the ENSO and rainfall extremes, to compose the climate indices for rice production in Taiwan. The study used the regression model for panel data random effects, estimated rice-climatic indices for the first and second rice crop yields, and based on the results to provide specific policy recommendations.

In this paper, we examine the relationship between CO₂ and SO₂ (including carbonaceous aerosols) mitigations in a framework of correlated global and local externalities. The framework is set up in a revised RICE model [Nordhaus, WD and Z Yang (1996). A regional dynamic general-equilibrium model of alternative climate-change strategies. American Economic Review, 86(4), 741–765], which we labeled as the RICES model (stands for RICE with ). In RICES model, we pioneer the empirical modeling of negatively correlated global and local externalities through negative radiative forcing of aerosols. Through simulating different scenarios, we quantify the impacts of local pollution control efforts at mitigating SO₂ emissions on climate change and indicate the policy implications of correlations between CO₂ and SO₂ emissions.