Optimal threshold in the case of GHG emissions from the European agricultural sector

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The economics of the adaptation to climate change

Current mitigation efforts are unlikely to be sufficient to prevent significant climate change in the coming decades. There is thus a need to assess the impacts of climate change, and the degree of flexibility that agents may use to moderate these impacts. The IPCC (2014) defines the adaptation to climate change as “the process of adjustment to actual or expected climate and its effects, in order to moderate harm or exploit beneficial opportunities”. The ease and flexibility of changing decisions, as well as the magnitude of climate change impacts that are moderated, define the adaptation margin. It depends on the impacts of climate change on natural or human-made assets, which must be obtained from other disciplines.
The economic approach to adaptation then fully exploits the results of these assessments and translates them into an economic response.
This definition entails a fundamental distinction between the effects of climate change and the economic damage caused by them. Climate change effects are the physical measure of climate change, such as extreme temperature variations. The damages of climate change correspond to the economic measure of climate change, i.e. the effects of temperature vari-ations on economic variables while accounting for agents’ adjustments.
The economic environment in which the adjustment decisions are made is decisive in accurately representing and assessing the adjustments margins to a modified climate. Con-sidering production costs, profitability of production alternatives, agents’ expectations, in-teractions with markets and prices, infrastructures or technologies, make that a climate-related drop in productivity does not mechanically translate into a proportional decrease in supply.
Economics can study how economic agents modify their decisions in a changing envi-ronment. Agents’ adjustments to changes in the conditions of production is a central ques-tion in microeconomics (Samuelson, 1947). Using for instance the envelope theorem in a microeconomic model, one can obtain theoretical predictions on the deviations from the private or social optimum in response to climate-induced changes in productivity (Guo and Costello, 2013; Hsiang, 2016). In particular, the analysis of the market and its adjustment mechanisms is central to the study of adaptation. The market plays a central role in mediating the effects of climate change and transmitting adaptation behaviors (Anderson et al., 2019). Market mechanisms make it possible, for example, to imagine that a generalized decrease in productivity for one sector in the world could tend to increase the price of the sector’s product and in re-turn intensify the production in some places that would mitigate the pure yield loss overall. Individual decisions to adapt are thus interdependant through the market, which gives a collective dimension to adaptation.
It is rather the proper consideration of the context of the adjustment decisions that ac-curately determines the adjustment margins. The timing context determines whether some inputs are fixed or variable in the face of a more or less rapid change in climate. The reg-ulatory context is also important. Existing regulations can distort market adjustments and potentially impede adaptation. For instance, the National Flood Insurance Program in the United States offers reduce flood insurance rates and is shown to bias downward the percep-tion of flooding risks (Kahn and Smith, 2017). The competition and market structures also determine the price and quantity adjustments on the market following a climate-induced change in costs or productivity.

Concerns about pricing emissions from the agriculture in practice

Agriculture remains to a large extent out of the scope of the main climate policy instru-ments. There are independent and voluntary initiatives, such as the Label bas-carbone in France. However, the Common Agricultural Policy, which is the overall framework for agri-cultural policy in Europe, does not include a binding mitigation target (Dupraz and Guy-omard, 2019; Guyomard et al., 2020). The ambitious goal of the Paris agreement to keep the temperature increase below 2°C above pre-industrial levels could materialize through the implementation of the Green Deal in the European Union, which aims at making Europe carbon-neutral by 2050. However, excluding agriculture limits the inter-sectoral flexibility and raises concerns about the possibility of reaching this ambitious objective efficiently.
Agriculture is a sector composed of numerous farms, which are highly heterogeneous in several dimensions. They differ in locations and climatic conditions, they have varying size and their crop mixes and livestock types are heterogeneous. This implies that there are important differences in the technical and agronomic potential to modify the production plan to a given emission norm or price. This heterogeneity confers a serious advantage to carbon pricing over regulatory instruments in the case of agriculture.
However, taking this heterogeneity into account is difficult when evaluating abatement costs. The effect of the tax on farmers depends on how emissions are initially distributed across farms and also on their ease to adjust their production plan accordingly, that is, the distribution of the abatement costs. A detailed representation of the agricultural produc-tion is required to adequately capture the heterogeneity of farmers’ response to a uniform price on their emissions. The informational and technical requirements to build such a rep-resentation is important and needs a thorough approach relying on farm-level data as well as a detailed modeling of the agronomic and technological constraints. This adds technical difficulties to obtain a realistic model of the reaction of farmers to the implementation of a mitigation policy.
There are several methods to integrate this heterogeneity in abatement costs assess-ments in the agricultural sector (see Vermont and De Cara, 2010, for an overview of the estimation approaches of the mitigation potential in the agriculture). One method, among others, harnesses greenhouse gas emission processes into a microeconomic model repre-senting farmers’ decisions and accounting for their agronomic and technical constraints. Agricultural greenhouse gases emissions mainly come from fertilizer use and livestock. They are affected by farmers’ decisions regarding land allocation, animal farming, or soil manage-ment. These decisions depend on economic dimensions regarding input or output prices. By putting a price on emissions, we modify these costs and we incentivize farmers to divert their resource allocations from emission intensive use. Depending on the sophistication of the modeling, the adjustments considered could be changes in herd size, changes in live-stock feeding, or reductions in fertilizer use. As a result, the farmer will adjust its farming practices and the emission reductions undertaken will be all those requiring an effort lower than the price of the emissions. These adjustments will be made under the assumption that farmers are rational, and observe their emissions. The abatement cost is then the differ-ence between the farmer’s revenue under carbon tax compliance and that in the absence of regulation. The model used in Chapter 2 is built to capture these trade-offs with a representativity of the different farming systems in the EU-27.

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Major trends on the economic contributions on climate change

In this section, I first present some aggregate trends regarding the literature on the eco-nomics of climate change. Then, I give more details on the content of this literature, its major evolutions, while putting in perspective the contemporary history of climate science and climate policy. Then, I highlight the main journals used by the profession to publish contributions on climate change. Finally, I investigate the citation metrics of the economic journals publishing on climate change in order to assess the prominence of this research topic relative to the rest of the economics.

Aggregate trends on the quantity of contributions

First, we notice a global increase in the number of articles related to climate change pub-lished each year in Figure 1.3. This increase has similar orders of magnitude when concen-trating on articles broadly related to climate change (black line) and articles strictly related to climate change (orange line). This finding is unsurprising given the boom of scientific publications recorded in the recent years. Nonetheless, this increase corresponds to an expansion in the coverage given to climate change by the economics overall. Indeed, the percentage of economic articles strictly related to climate change published each year has increased and now exceeds 2% (Figure 1.1, gray line).
Second, Figure 1.3 shows the strong initial interest in the economics of the mitigation to climate change untill 2005 (light blue line). From then, we notice the now significant share of the economic literature on the adaptation to climate change (navy blue line). This sub-ject currently represents around a quarter of the total economic articles on climate change published each year.

Evolutions in the content of the contributions

To present the content of the corpus, I break it down into four time periods: (a) from 1974 to 1991, (b) from 1992 to 2005, (c) from 2006 to 2014 and (d) from 2015 to 2020. I construct these periods to follow patterns in the evolution of publications related to climate change—these time periods are represented on Figure 1.3 (vertical dotted lines)—and to coincide with his-torical facts regarding climate policy, climate science, and influential economic articles over the period. Note that Table 1.B.4 in appendix presents the most cited articles by time period.
(a) From 1974 to 1991 The first article related to climate change and included in our cor-pus traces back in 1974 and studies the impact of potential climate change—here under-stood as a decrease in temperature—on wages using a hedonic model (Hoch and Drake, 1974). The publication year of this article also coincides with a decade during which eco-nomic scholars began to focus on the sustainability of economic growth under finite supply of resources. The famous report of the Club of Rome—entitled “The Limits to Growth” and not included in our corpus—is published in 1972 (Meadows et al., 1972). In 1977, Nordhaus addresses a speech at the AEA annual meeting—published as an AEA Papers & Proceedings and included in our corpus—where he exposes the global externality of economic activities due to their associated emissions of GHG. In this work, he gives estimates of the social costs of GHG emissions, which he explicitly labels as carbon taxes (Nordhaus, 1977).
This first period marks the origins of the economic studies on climate change.10 Climate-related concerns remained marginal in the economic profession over this period, as illus-trated by the uncertainties and dissensus regarding the reality of climate change at that time.11

Table of contents :

General Introduction 
Economics of climate change
The economics of mitigating greenhouse gas emissions
The economics of the adaptation to climate change
Challenges of transitioning the agriculture to a carbon-neutral and resilient sector
Concerns about pricing emissions from the agriculture in practice
Assessing the adaptation of the agricultural supply
Contributions
Bibliography
List of Publications
1 A systematic review on the economics of climate change 
1.1 Introduction
1.2 Construction of the bibliographic corpus
1.3 Major trends on the economic contributions on climate change
1.3.1 Aggregate trends on the quantity of contributions
1.3.2 Evolutions in the content of the contributions
1.3.3 The journals of the economics of climate change
1.3.4 The relative prominence of climate change economics
1.4 The topic structure of the economics of climate change
1.4.1 The Latent Dirichlet Allocation topic model
1.4.2 Discovering the ten topics
1.4.3 Methodology to measure topic trends, topic similarity, topic specificity and to identify research directions
1.4.4 Insights on research topics in the economics of climate change
1.5 Conclusion
1.A Additional information on the corpus construction
1.B Additional tables
1.C Additional figures
2 Optimal coverage of an emission tax in the presence of monitoring, reporting, and verification costs 
2.1 Introduction
2.2 Analytical framework
2.3 Optimal threshold
2.3.1 Characterization of the optimal threshold
2.3.2 Optimal threshold under constant-elasticity MRV costs and net social value of abatement
2.3.3 Discussion: Informational requirements and incentives
2.4 Abatement costs of greenhouse gas emissions in the EU agricultural sector
2.5 MRV costs data and assumptions
2.6 Optimal threshold in the case of GHG emissions from the European agricultural sector
2.7 Concluding remarks
2.A Proofs
2.A.1 Proof of Proposition 2.1
2.A.2 Proof of Proposition 2.2
2.A.3 Proof of Proposition 2.3
2.A.4 Proof of Proposition 2.4
2.B Empirical application results
2.B.1 Descriptive statistics
2.B.2 Aggregate abatement supply
2.B.3 Farm-level net social value of abatement: Estimation results
2.B.4 Results under various assumptions
3 Adapting Geographical Indication to climate change 
3.1 Introduction
3.2 Modeling the market of the GI product
3.3 The historical allocation of GI production rights
3.4 Relocating the GI area of production under climate change
3.5 Barriers to the relocation of the GI area and their implications for the regulation of GI labels
3.6 Conclusion
3.A Proofs
3.A.1 Proof of Proposition 3.1
3.A.2 Proof of Proposition 3.2
3.A.3 Proof of Proposition 3.3
3.B Additional figures
3.B.1 Additional illustration of Propositions 3.2 and 3.3
3.B.2 Detailed interpretations of Figure 3.3
3.C Additional materials
3.C.1 Details on the construction of the GI demand and alternative assumption
3.C.2 Concavity of the GI net land rent and welfare function
3.C.3 Detailed derivatives of the comparative statics under climate change
Conclusion 214
Main results
Limits and future research perspectives
Bibliography

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