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Clim Change,water Scarcity On Agriculture And The Economy-wide Impacts

Congress: 2015
Author(s): Roberto Ponce (Concepcion)

Keyword(s): Sub-theme 17: Climate change, impacts and adaptation,
AbstractWater resources are facing several stresses in terms of quantity and quality. These pressures are closely related to the human interventions in fields like: agriculture, land-use/land-use change, construction/management of reservoirs, pollutant emissions, and water/wastewater treatment, among others. Within this context, the expected changes in both demographic trends and climate patterns will exacerbate the challenges faced by water resources (Bates et al 2008). Considering the current and expected pressures over water resources, both the competition for water and the conflicts among users are expected to increase. Climate change is already happening in the Latin American and the Caribbean Region (LAC). According to the Economic Commission for Latin America and the Caribbean (CEPAL) the region showed an increase on the median temperature within the period 1906-2005. Regarding precipitations, within the same period the region had faced increases in precipitation in some countries (Paraguay, Uruguay, and Bolivia), while in the north, northeast, and northwest regions the precipitation has decreased. Furthermore, there is evidence that shows a decrease in the glaciers surface, threatening the long-term water supply (CEPAL 2010). Considering the critical role that water plays for the agriculture, any shock in water availability will have great implications for the agricultural production, and through agricultural markets these impacts will reach the whole economy. Besides, considering only the expected population increase, a large investment in the agricultural sector will be needed in order to assure food supply, which implies to re-allocate resources from other economic sectors. Due to these economy-wide implications, the main focus of this paper is the use of the general equilibrium approach to study agricultural water related issues. The aim of this paper is to present a new methodological approach in order to include water within the Intertemporal Computable Equilibrium System, the ICES CGE model developed by Fondazione ENI Enrico Mattei. The ICES model is used in order to explore the economy-wide consequences of a reduction in water availability for the LAC region. The model bases its structure on the GTAP-E model (Burniaux and Truong 2002). Considering that agriculture is one of the major water intensive sectors worldwide, the inclusion of water has been limited to the agricultural sector. On the other hand, the expected impacts of climate change on the agricultural sector are function of the technology used by each agricultural sector. The model considers two different technologies associated to water provision for the agricultural sector: irrigation and precipitation. If we consider irrigation as an adaptation strategy to climate change, it would be reasonable to expect diverse impacts for both rainfed crops and irrigated crops. The model considers these diverse impacts accounting for differences between rainfed and irrigated land. Taking into account that water does not have a market price it is not possible to compute the value of water to include it into the model's structure. In order to overcome this shortcoming, the methodology considers water as a physical endowment that affects the productivity of the agricultural sector. Thus, it would not be necessary a price for that endowment, nevertheless it is assumed that the water endowment would influence the productivity of the agricultural sector. The rationale behind this formulation is that water affects agricultural productivity depending on the type of land: i) For rainfed land it depends on precipitation, ii) for irrigated land it depends on specific investments made to provide irrigation services. For this purpose the model considers investments in a specific type of capital, which is extracted from the existing physical capital stock and classified from now on as "irrigation capital". Furthermore, the positive externality provided by water use is modeled as an increase in the factor specific productivity of irrigation capital in agriculture that depends on changes of water availability. According to a first round of simulations, all the agricultural products show an increase on the price paid for the use of rainfed land (Land), the magnitude of the change depends on the specific region, ranging from 78% on the price paid in Peru to 203% on the price paid in the EU27. This increase on prices drives a different reactions depending on the region and the agricultural product . Regarding the capital devoted to irrigation (IrCapital), on average at global level this endowment is part of the irrigated land composite that substitutes for rainfed land (Land) on all agricultural products. For the LAC region, this characteristic holds for all agricultural products, except for wheat in which they are complements. In general, according to our results, a decrease in precipitation will drive a complete reallocation of output production across countries. In the LAC region, the impact on the agricultural output is two times the one predicted for the global level, 3% and 1.6% respectively. These results could be explained by the relatively small amount of the endowments: irrigated land and capital for irrigation, within the LAC region. On average, the initial endowments of both inputs are smaller in the LAC region than at the global level. Due to the change in precipitations, it should be reasonable to expect some degree of substitution between rainfed land, which is less productive, and irrigated land. Our results show that this substitution holds on average for all the agricultural products. Bates et al. (2008). Climate Change and Water. Technical Paper of the Intergovernmental Panel on Climate Change. Geneva: IPCC Secretariat. Burniaux, J., & Truong, T. (2002). GTAP-E: An Energy-Environmental Version of the GTAP Model. GTAP Technical Paper . CEPAL. (2010). Economics of Climate Change in Latin America and the Caribbean. CEPAL.
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