Econometric Approaches That Consider Farmers’ Adaptation in Estimating the Impacts of Climate Change on Agriculture: A Review

Abstract

The question of whether and to what extent farmers can adapt to climate change has recently gained academic interest. This paper reviews contemporary econometric approaches that assess the impacts of climate change on agriculture and consider farmer adaptation, complementing previous methodological reviews with this distinctive adaptation perspective. The value of adaptation can be measured by comparing the differences between the long-term climate change effect and the short-term weather shock effect. However, this theoretical model has not yet been well supported by empirical evidence, as it is difficult to identify true adaptation, incorporating adaptation cost, and estimated adaptation rate. Quasi-natural experiments, cost-benefit analysis, and Bayesian models are effective tools to address these methodological drawbacks. Two methods dominate in the estimation of climate effects, but each has its own advantages. A good estimate provides a trade-off between the incorporation of farmers’ adaptive behavior and the reduction in omitted variables bias. Cross-sectional data models based on climate variability can capture farmers’ long-term adaptations but are prone to bias due to omitted variables. Panel data models are more effective at mitigating omitted variable bias by applying fixed effects, but do not consider farmers’ adaptative behavior to long-term climate change. To address this dilemma, several cutting-edge approaches have been developed, including integration with the weather and climate model, the long differences approach, and the long- and short-term hybrid approach. We found three key challenges, namely: (1) exploring adaptation mechanisms, (2) the CO2 fertilization effect, and (3) estimating the distributional effects of climate impacts. We also recommend future empirical studies to incorporate satellite remote sensing data, examine the relationship between different adaptation measures, model farmers’ future climate expectations, and include adaptation costs.