Reproduced, with permission, from:
Godden, D., and P. D. Adams. 1992. The enhanced greenhouse effect and Australian agriculture. In Economic issues in global climate change: Agriculture, forestry, and natural resources, ed. J. M. Reilly and M. Anderson, 311-31. Boulder, CO: Westview Press.
David Godden and Philip D. Adams[1]
Investigations of the potential impact of the enhanced greenhouse effect (EGE) on agriculture have generally emphasized production-capacity effects. These effects are a CO2 fertilization effect; yield effects resulting from climate changes, with lesser effects from pests, diseases, and weeds; and effects on the variability of agricultural production. Second-order adaptive effects include changes in agricultural technology and management responses (e.g., Parry et al., 1990).
Parry and Carter (1988) presented a more complete, but essentially linear, analysis of climatic change operating through agriculture: Climate affects yield, which affects farm output, with consequent regional and/or national output effects, with ultimate farm, regional, and national adjustments to output changes (see also Parry and Carter, 1989). This model was mirrored in the draft report of Section A (Agriculture and Forestry) of Working Group II of the Inter governmental Panel on Climate Change (IPCC, 1990). Crosson (1989a, 1989b) added environmental costs in agriculture and, summarizing earlier authors, changes in comparative advantage.[2] Easterling et al. (1989) located the problem of global warming for Midwestern farmers in the United States in the context of an interconnected world agricultural model. S. Kane, J. M. Reilly, and R. Bucklin (reported in Walker et al., 19S9) investigated possible world-trade effects of the EGE, based on assumed crop-yield changes in different Countries.
A production-oriented focus is far too narrow for investigating the potential impact of an EGE, especially for Australian agriculture. So, too, is Parry and Carter's (1988) "linear" model, in which the direction of causation is from climate change, through agricultural-production effects, to higher-order effects. A more comprehensive investigation of EGE agriculture relationships in Australia requires analysis of (1) EGE's potential direct effects on natural resources and agricultural production; (2) the potential indirect effects of EGE on natural resources and, thus, on agricultural production; and (3) socioeconomic effects of the predicted EGE, including management responses to the direct and indirect effects of EGE on natural resources (e.g., on production costs); management responses to changing demands for goods and services as a consequence of EGE; and collective policy responses--both of agriculture and of the wider economy--to EGE or its consequences.
Because the individual effects of EGE are likely to be interrelated, the direction of these effects can only be modeled in a general-equilibrium framework. Evaluation of the size of these responses requires quantitative general-equilibrium modeling. Incorporation or EGE effects in quantitative general-equilibrium models requires a systematic examination or the economic structure of the agriculture in which these effects operate.
In this paper, therefore, a brief description or the key characteristics of Australian agriculture is followed by a similarly brief survey of likely direct, indirect, and socioeconomic effects of EGE on Australian agriculture. A systematic analytic framework for incorporating EGE effects on Australian agriculture is then described, including a discussion of possible welfare effects in a partial-equilibrium setting. Because of the effect of macroeconomic variables on Australian agriculture, aggregative variables potentially directly affected by EGE-- which are likely to interact with purely agricultural production-oriented EGE effects--are described in the next section. In the final section, a simple experiment is described that uses a computable general-equilibrium model of the Australian economy to compare two classes of economic effects of EGE on Australian agriculture.
Approximately half of Australia's land area receives <400 mm (16 inches) of rain per year (Davidson, 1981). Rainfall variability is high, and more than three-quarters of the land mass has a growing season (defined in terms of a ratio of rainfall to evaporation) of <5 months (Davidson, 1981). Broad land-use regions depicted in Davidson (1981) are briefly described below. Two separate areas are suited to moderately intensive agriculture; both are, except for some irrigated areas, within [[ordfeminine]]400 km of the coast. The first area runs from near Townsville, Queensland, in the northeast, down the east coast to midway along the southern coastline. The second area suited to moderately intensive agriculture lies in the southwest corner of the continent.
Areas of more intensive agriculture are generally structured as mixed farms--principally sheep (for wool and meat), cattle, and crops (predominantly wheat, with barley and oats as the other main winter crops; summer cropping in summer-dominant rainfall areas includes dryland corn, sorghum, sunflower seed, and soybeans). Enterprise substitution in mixed farming, which is constrained in the short run by investment in cropping machinery and the build-up phase of livestock enterprises, is generally high. Irrigated areas of the South include rice in a mixed-farming system. There are some areas where agriculture tends to be more specialized: sugar cane on the northeast coast; sheep or cattle grazing on eastern uplands; dairy farming in well-watered or irrigated areas of the South; cotton on irrigated areas in the inland part of the central eastern seaboard; wine grapes in many areas of the Southeast and Southwest and sultana grapes in the South; intensive horticulture (stone and pome fruits, citrus fruits, and vegetables) in many, especially irrigated, areas; and intensive livestock (pigs and poultry) in the grain belt or close to urban areas.
Rural exports (including small amounts of forest and fish products) constitute [[ordfeminine]]30% of Australia's total exports of goods and services (ABARE, 1990). Many agricultural industries are heavily export-oriented. In 1988-1989, all crops constituted 20% of the total value of farm production (TVFP); wheat alone was 12% of TVFP. Approximately 40% of all crops by value (and 70% of wheat) was exported. Corresponding figures for other groups in 1988-1989 were as follows: meat and live sheep, 23% of TVFP and 40% exported; wool, 26% of TVFP and >90% exported; and dairy, 8% of TVFP and 30% exported. (High proportions of cotton and sugar are also exported, but their degree of processing makes it difficult to estimate a proportion of farm value. Ratios for other product groups were roughly reduced to reflect processing value added m the value of exports.)
Even in more intensively farmed areas, agriculture is very extensive compared with that in the Northern Hemisphere. Agriculture is relatively extensive because of high ratios of land to labor (Hayami and Ruttan,1985), a traditional reliance on export markets, and a general reluctance or inability of Australian governments to subsidize Australian farmers sufficiently for more intensive agriculture to be profitable.
The potential effects of a possible EGE on natural resources include CO2 availability, ambient Temperature (level and seasonal distribution), rainfall (amount, intensity, and distribution), and wind and their effects on farm production characteristics such as yield, land degradation (erosion, salinity, nutrient loss, and leaching), and externalities [e.g., pests, diseases, and weeds; compare with Randall (1987), chapter 9].
Effects of EGE on natural resources would partly be directly environmental, but would also be substantially conditioned by management response. For example, possible effects of EGE on erosion include the direct effects of rainfall amount, intensity, and distribution; the indirect ecological effects through changes in associated flora (both indigenous and exotic species) and fauna (indigenous, and exotic species both husbanded and feral); and a management response (conditioned by both the natural and socioeconomic environments; see below)[3]. Management response would include changes in husbandry practices and enterprise mix as a consequence or EGE's effect on direct-production costs as well as changes in farm structure, externalities, and product demands. Of major importance to management would be possible changes in production variability.
Because Australian agriculture is heavily export-oriented, changes in the demand for Australian agricultural produce may be as important as, or even more important than, domestic-production effects. these demand effects would be principally generated externally. For example, in an EGE-warmed world, substituting clothing warmth for fuel warmth would benefit Australian wool production in fiber-fuel substitution into wool outweighs the reduced demand for warmth protection. These effects for Australia would arise not only from final demand, but also as a consequence or production changes in other regions. For example, demand for Australian grains could rise if grain production in the rest of the world were detrimentally affected compared with Australia, or the demand for Australian grass-red beef could increase compared with that for grain-red beef in the rest of the world in EGE were followed by rising international grain prices. Similar changes may also arise from macroeconomic effects (see below).
Potential socioeconomic consequences of EGE also include collective policy responses to EGE. Both domestic and external policy responses are likely to Affect Australian agriculture. Domestic policy responses to EGE include allocative-efficiency responses (e.g., changing investment and disinvestment decisions in publicly provided infrastructure--roads, railways, grain-handling facilities, and agricultural research and development--in response to the demand for, and costs of providing, these services) and distributive responses (e.g., changing direct subsidies, or providing subsidized infrastructure, in response to the effects of EGE on particular groups). A second type of domestic policy response includes economic-management decisions, such as the direct and indirect effects of EGE-mitigating policies (e.g., carbon taxes or emission quotas) and macroeconomic responses that might affect the level of Domestic demand, interest rates, and exchange rates.
Possible external policy responses mirror domestic responses. Of most direct consequence--from Australia's perspective--are other countries' policies that affect the excess demand for Australian agricultural produce[4]. If EGE detrimentally affects farm incomes in developed countries in the Northern Hemisphere, increased farm protection in response to EGE would further exacerbate existing negative effects on Australian agriculture of these countries' existing agricultural protection (Crosson, 1989b). A public-choice, rather than a public-interest, theory of agricultural policy--for example, Ruttan's (1978) "induced institutional innovation" --suggests that, if EGE obviously and adversely affects developed countries in the Northern Hemisphere, then these governments are likely to respond by increasing agricultural protection.[5] Imposition of direct or indirect constraints on greenhouse-gas emissions outside Australia may indirectly affect Australian agriculture through exchange rates (see below).
Analyses of potential effects of EGE on Australian agriculture have concentrated on yield and output effects (e.g., Walker et al., 1989; Pittock, 1989; Nulsen, 1989; Landsberg, 1989), climate and agricultural variability (e.g., Hobbs et al., 1988), and the effects of pests (e.g., Sutherst, 1990), although it has been noted in passing that export demand will play a major role (e.g., Pittock, 1989; MPE, 1989).
The production-economics framework outlined below is conventionally neoclassical. We do not model production discontinuities--for example, changes in production sets as a consequence of extreme events--even though, in the more fragile ecosystems of Australian agriculture, such discontinuities have been observed (e.g.., the long-run degradation of arid pastoral lands in western New South Wales after overgrazing by introduced sheep and rabbits was capped off by a calamitous drought from 1899 to 1902). Ignoring discontinuities in production sets was justified because the better-watered Australian agricultural areas .appear more resilient to extreme events, and most Australian agricultural output comes from these areas.
Production Function-Single-Product Firm
For the single-output production function, effects of EGE may be modeled as changes in the input-output relationship. If EGE is uniformly favorable (unfavorable) to production, then EGE will be comparable to disembodied technological progress (regress) and may be modeled by shifts in the location of production isoquants. These changes may be "Hicks-neutral," if the isoquants migrate homothetically, or "Hicks-biased" (nonhomothetic migration). Several possible biological interpretations of such changes exist:
Hicks-neutral changes. If EGE simply resulted in uniformly more (or less) growth or all desirable plant species because of higher rainfall with no other effects, then output would increase (or decrease) in a Hicks-neutral way. Agricultural production changes in response to input-price changes would he similar to the non-EGE regime, but at different Levels.
Hicks-biased changes. Continuing the previous example, if EGE brought greater growth of desirable plant species because of higher rainfall, but fertilizer was leached more rapidly from soils, then EGE would result in a Hicks-biased form of technological regress and would be fertilizer-saving. Thus, for unchanged relative prices of inputs, the production system would use relatively more (Less) of the inputs advantaged (disadvantaged) by EGE.
As well as affecting the location of the isoquants, EGE may also change the elasticity of input substitution. Such changes are important because they would affect the flexibility of farm response to changes in input prices. If the elasticity of input substitutability increased (decreased) with EGE, the production technology would become more (less) responsive to changes in input prices. Consider the biological underpinnings of the substitutability of machinery and labor: suppose substitution of machinery for labor occurs through the use of larger or heavier machinery. If EGE is accompanied by higher rainfall, then, on heavier soils, larger machinery may become relatively less suitable because of increased compaction in generally wetter soil conditions, with accompanying yield reductions. The elasticity of substitution of machinery for labor would be reduced, indicating fewer opportunities for substituting machinery for labor as the price of machinery falls relative to the price or Labor. Alternatively, for similar reasons, wetter conditions may change the substitutability between land-based machinery and aerial machinery: if generally wetter conditions favor plant growth, but land based machinery leads to increased soil compaction, then an inward shift of isoquants primarily at relatively high levels of use of aerial inputs would increase the elasticity of substitution between land- and air-based machinery.
If EGE leads to biased technological change that, for a particular input, is input-saving for some input combinations but input-using for other combinations, then the enterprise effects of EGE will be considerably more complex. The post-EGE isoquant map will intersect pre-EGE isoquants, and the consequences for relative input use for constant relative input prices will be more difficult to determine. These problems will be exacerbated if elasticities of substitution among inputs also change with EGE.
Multi product Firms: Regional Impacts
Because Australian farms usually produce more than one product, it is preferable to model them as multiple-output, multiple-input firms. This framework may also be used to examine regional production effects. Analogous to previous arguments, the potential effect of EGE on the mix
or outputs and inputs in multi product firms or regions may be represented by Hicks-neutral or Hicks-biased technological progress or regress, and/or be changes in the elasticity of substitution among inputs and outputs.
The potential effect of EGE on a multi product firm's input demands and output supplies could be examined analytically through its effect on production parameters. EGE's quantitative impact could be examined in a model where EGE effects were represented numerically (e.g., econometric or programming models of production systems). With appropriate aggregation conditions, or assuming profit maximization at the regional level, the regional effects of EGE could be investigated analytically through
he regions input-demand and output-supply functions, and the quantitative impact examined by appropriate models.
Aggregate Supply
The possible agricultural effects Or an EGE were characterized in the first two sections as firm- and regional-level production functions. By using profit maximization, simple analytical representations Or firm-, regional-, or industry-level production functions may be converted into their corresponding supply-response analogous. With duality, supply-response equations may be derived from cost or profit functions. The effect Or EGE may then be represented in supply-response or input-demand equations. EGE may he introduced as an additional variable (most simply, as a lime shifter representing the effect of EGE), or, alternatively, the parameters (or even functional form) or the supply-response or input-demand equations may be modified directly to represent EGE.
Conversion Or the production effects of an EGE into a supply-response framework permits consideration of the welfare effects of production changes induced by EGE. In the single-output framework in a closed economy, with EGE causing a simple parallel shift in a linear supply schedule, the welfare effects Or EGE can be represented by the area between the supply schedules and bounded by the demand schedule. The direction or welfare effects for simple types of EGE impacts can be summarized (Table 17.1). Without such simple and unlikely assumptions, numerical modeling would be required to estimate the likely welfare effects of EGE, even on small regions. If the size of the EGE effect on production can be estimated, the welfare effects of EGE may be estimated in a partial equilibrium context with models used for investigating the benefits of research, like that Or Davis et al. (1987).
Production Dynamics
In the preceding discussion, it was implicitly assumed that EGE causes an instantaneous, once-and-for-all change in production conditions. However, EGE is likely to occur incrementally, perhaps even unnoticeable, from year to year, and possibly with significant lagged effects. The process of EGE-induced production effects, and the nature of the emergent responses in agriculture, may be as important as the effect of EGE itself Also, EGE may not simply affect environmental variables unidimensionally, but may also have more complex effects. For example, there may not just be increases or decreases in rainfall or temperature, but there may also be changes in the variability or distribution of these variables.
Asset Fixity. Physical and human capital is specialized in varying degrees to particular forms of agricultural production. If EGE becomes progressively evident, there will be a shift away from those enterprises that are relatively less favored, or detrimentally affected, by EGE. However, the speed and extent of this shift will be modified by the reactions of decision makers to these changes. As EGE changes the relative profitability of enterprises, the value of physical and human capital specialized in those enterprises of declining profitability will decrease. Some of these assets may become immobilized in the declining enterprises as the value of this capital declines. If the cost of investment in human capital for new enterprises is high (e.g., significant new knowledge and skills are required for the preferred new enterprises) and some farmers cannot afford the necessary investment (e.g.., they cannot afford the opportunity cost of investing in new human capital), then these farmers may become locked in to the increasingly less favored enterprises. Alternatively--and perhaps relatedly--if capital markets arc imperfect and the cost of borrowing to invest in new physical capital is high, then some farmers may be locked in to the less-favored enterprises because they cannot acquire the capital necessary for the more-favored enterprises. This asset immobilization will be exacerbated if the average age or farmers is high, because for-farm employment opportunities will be increasingly restricted for older farmers, and farmers approaching retirement arc likely to be less willing to change occupation and more able to survive decreased family income because they are likely to have fewer dependents.
The slower the rate at which EGE affects agricultural production, the lower the likelihood that asset fixity will be a serious problem. Further, for assets with short asset lives, there will be frequent opportunities to consider whether such assets should be replaced, or alternative investments should be undertaken. Similarly, the slower the rate Or expression of EGE, the lower the opportunity cost or acquiring new knowledge and skills, and the greater the possibility that new capital can be acquired by a new of generation of farmers at the Same cost that would have been required for investment in the previously optimal set of knowledge and skills.
New technologies. If EGE has a detrimental effect on the production process, new technologies may be developed to completely or partially offset the impact or EGE. For example, suppose EGE in eastern Australia results in wetter summers and drier and more variable winters. The consequent deleterious effects on winter-cereal production could be offset if new winter cereal varieties are developed that are more efficient in their use of water and more tolerant of water shortage and that could be harvested successfully in wetter conditions. If harvesting occurs in wetter conditions with increasing frequency, grain drying might be increasingly adopted and improved.
It is not immediately obvious whether or not the allocation of resources should vary because Or EGE. However, the general principles concerning the allocation of resources to research arc the same whether or not there is an EGE. Research resources should be allocated among enterprises so that the marginal benefit from research is identical regardless Or the enterprise additional resources are allocated to, and total research resources should be allocated until the marginal cost Or research is identical to the present value or the marginal benefits of this research.
The research-resource-allocation problem with EGE is therefore similar to the maintenance-research problem (in which new plant varieties become increasingly susceptible to diseases over lime). With EGE, however, the problem is to evaluate production systems for all enterprises in terms of a possible EGE and then to assess how EGE may interact with possible new technologies.
The importance of formally considering allocation of agricultural research resources in the context of EGE is that, should EGE detrimentally affect particular enterprises, there will be the temptation to attempt to counteract these effect by developing new technologies. In an institutional setting in which research resources are allocated by public-choice rather than public interest mechanisms, there may be strong political pressures to develop counteractive technologies as a short-run response to EGE problems in an attempt to protect existing farm investments in enterprises detrimentally affected by EGE. Although it may be feasible to counteract EGE in this way, it may not necessarily be socially optimal. If EGE affects enterprises monotonically--that is, once a beneficial or detrimental effect occurs, it intensifies over time--the shorter the perspective taken in allocating research resources, the more likely it is that research resources will be misallocated. Unfortunately, this short-run perspective is likely to characterize a public research effort that is responsive to political pressure.
The pattern of agriculture's response to a possible EGE will depend on the particular sequence of decisions by public and private decision makers in response to this EGE. Response through time will partly he governed by the current stocks of physical and human capital in the farming sector and by stocks of physical capital in the downstream industries that transport, store, and process agricultural products. The responses to EGE of public agricultural agencies--for example, those agencies that provide rural infrastructure; undertake research, extension, and regulatory activities; or redistribute income to the agricultural sector--will also affect the way agriculture responds. If these agencies see their roles as Canute's courtiers, agricultural adjustment to EGE will be impeded.
Because EGE, or policy responses to EGE, may affect the supply of inputs to agriculture or the demand for agricultural outputs--for example, through the imposition or carbon or methane taxes--examination of the possible impact Or EGE cannot appropriately be effected assuming constant input or output prices.
If carbon taxes are imposed, the price Or hydrocarbon-based energy (e.g., petroleum-based fuels and coal-derived electricity) or inputs whose production requires high amounts of these inputs (e.g., petroleum-based chemicals and steel) would become relatively more expensive. In agriculture, the prices or inputs like diesel fuel, gasoline, electricity, agricultural chemicals, and fertilizers would rise compared with the prices of inputs like labor. It is difficult, however, to determine how the relative prices of inputs within the "high-greenhouse-gas" group would change, because the degree to which input prices may rise depends on the greenhouse-gas intensity of their production processes. The effect of these relative price changes on relative input use in agriculture depends not only on the degree of the change in relative prices, but also on the elasticity of substitution of these inputs in agricultural production. If this elasticity is low, the consequent change in relative input use will also be low, even If there is a marked change in relative input prices.
The effect of EGE on agricultural-input prices will not only arise from an EGE-induced policy response affecting production costs for greenhouse gas-intensive industries. Competing demands in other sectors for resources used in producing agricultural inputs may also be affected by EGE or EGE induced policy responses. If an optimal EGE-induced policy response increases the production or energy from non hydrocarbon sources (e.g., nuclear, hydroelectric, solar, or wind), major construction works would be required to harness energy from these sources, and there would be a consequent large increase in demand for capital, material, and labor inputs required for the necessary investment. Unless the supply or these inputs is infinitely elastic, the increased nonagricultural demand for these inputs would increase the price of these inputs in agriculture.
EGE-induced changes in the demand for Australian agricultural produce may emerge from a variety of sources, including (1) direct changes in patterns or final demand for agricultural products--either in Australia or overseas--thus affecting the demand for Australian agricultural production, and (2) the excess demand for Australian agricultural output, a function not only of final demand, but also of the production of similar products, substitutes, or complements in other countries.
The emergence of EGE may affect the relative prices of agricultural and nonagricultural products. For example, if the external cost of greenhouse gases is internalized in the price of goods, then the price of energy for heating may rise relative to the price of using clothing for warmth. Thus, the demand for clothing for warmth may rise and, consequently, the demand for fibers such as wool and cotton. This effect would be reinforced by the potential effect Or carbon taxes on the price of synthetic fibers. This substitution effect may conceivably be large enough to offset the reduced demand for clothing fibers because or general atmospheric warming (Pittock, 1989).
Three broad macroeconomic mechanisms that may transmit EGE effects external to agriculture into the Australian agricultural sector are exchange rates, aggregate demand, and savings and wealth.
If overseas countries' reactions to EGE lead to reductions in the export demand for Australian energy exports and their complements, or energy intensive products, then a significant downward pressure on the Australian exchange rate is likely, other things being equal. This effect would raise the Australian dollar price of non-energy-related exports and increase the price of all Australian imports, thus increasing the profitability of non-energy intensive export and import-competing industries. Agricultural exports, and some agricultural commodities that face (or may face in the future) import competition, would benefit significantly from exchange-rate changes arising from adverse changes in energy-related exports.
The aggregate effect of changes affecting the Australian exchange rate can only be derived in a quantitative general-equilibrium framework, but the direction of change in increasing the relative profitability of agricultural production seems plausible. This increased profitability will increase agricultural production, drawing factors (i.e., land, labor, and capital) and other production inputs into the agricultural sector. Thus, an EGE-induced policy response--generated either within or outside Australia--that reduced Australian exports of energy-intensive commodities would increase the relative prosperity of the Australian agricultural sector and encourage output expansion in Australian agriculture.
Policy responses to EGE that increase the direct costs of activities producing greenhouse gases will reduce the consumption of goods and services produced by these activities. Conversely, EGE-induced policy responses will increase consumption of some goods and services, especially under the general heading of environmental amenity. In particular, individuals' private consumption expenditures are likely to be reduced because of increased prices of many conventional goods and services that are greenhouse-gas intensive. Similarly, private wealth is likely to be substantially reduced because the profitability of private production activities producing high amounts of greenhouse gases will also have been reduced. The size of these effects is unlikely to have a major impact on agriculture because the income elasticity of demand for agricultural products is low and wealth effects on demand for agricultural products is similarly likely to be low.
Addressing the potential problem of EGE brings up the fundamental issue of inter generational transfers of productive assets. Continued production activities that store up greenhouse problems for future generations are a form of dissaving, or borrowing the income of future generations. Conversely, current policy responses that reduce future potential greenhouse problems will force savings on present generations to the potential benefit of future generations. The additional savings by present generations to reduce potential future greenhouse problems could come from two possible sources: diversion of current investment from other uses, an-i increasing the current amount of savings to enable both investment in greenhouse mitigation and continuation of existing investment. If greenhouse-gas-mitigating strategies were financed by reduced investment outside agriculture, then agricultural investment would only be affected if agriculture itself were directly affected by the mitigation strategy--for example, increased input prices through carbon taxes or methane taxes. If greenhouse-mitigating strategies were financed by diversions of government investment away from present infrastructure investment or by reductions in transfer payments, then agriculture would be affected to the extent that government infrastructure investment reductions reduced agricultural profitability or that reductions in transfer payments reduced farmers' incomes. If greenhouse-mitigating strategies were financed by greater savings and investment, then the effects on agriculture would be a higher interest rate on savings for net tenders and a higher interest on borrowings for net borrowers, and increased demands for investment goods, leading to higher prices for these investment goods to the agricultural sector. The likely impact or these effects on Australian agriculture is small.
The possible agricultural effects of EGE in Australia are likely to be so pervasive, potentially reinforcing or self-canceling, and often subtle that it is impossible to use yield effects alone as a proxy for welfare effects. In addition, potential EGE effects on Australian agriculture could arise either from direct impacts in the agricultural sector itself, or possibly from quite remote effects elsewhere in the domestic or international economies. As indicated in preceding sections, a general-equilibrium framework is required to derive satisfactory conclusions about the possible effects of EGE on Australian agriculture.
A simple general-equilibrium experiment for investigating possible EGE effects on Australian agriculture is summarized in Table 17.2. In this experiment, one possible detrimental effect of EGE on Australian agricultural production--a reduction in wheat production in the wheat-sheep zone[6]--is compared with one possible beneficial demand effect (see below). There is much conjecture about the possible effect of EGE on Australian wheat production: there are possible beneficial or detrimental yield effects (from changing rainfall patterns pests and diseases) and possible expansions or contractions in wheat area from movement of the wheat belt s current boundaries (compare with Walker et al. 1989; Pittock 1989; Nix 1990; NSW Agriculture & Fisheries 1990). We assume a detrimental effect of an EGE on wheat production in the wheat-sheep zone as a possible worst-ease scenario.
The assumed demand-side effect was the imposition of carbon taxes overseas which reduces the demand for Australian coal. With a trade balance constraint this reduction in coal exports will lead to increased exports of Australian agricultural products. This demand effect operating through the exchange rate is not exclusively beneficial to agriculture: exchange-rate depreciation increases the overseas competitiveness of all traded goods industries.
This experiment was run using the ORANI computable general equilibrium model of the Australian economy (Dixon et al. 1982). The effect of EGE was modeled as a 1 %/year decline in wheat yield in the wheat sheep zone over the period 1988-1989 to 1994-1995 [in physical terms 1.5 g*m-2*year-1 ([[ordfeminine]]15 kg*ha-1*year-1) and the policy response as a 1%/year decline in world demand for Australian black-coal exports over the same period (a price reduction of [[ordfeminine]]0.05-0.06 U.S. cents/kg or [[ordfeminine]]50-60 U.S. cents/metric ton per year at current export levels).[7]
The principal assumption or the base-ease scenario is that Australia s foreign debt as a proportion of gross domestic product (GDP) is stabilized by 1994-1995 (compare with Dixon et al. in press). The other main exogenous assumptions are an average real interest rate on foreign debt of 4%, inflation of 5%/year, real government consumption increasing at 2.25%/year, decline in Australia's terms Or trade of 1%/year, aggregate employment increasing at 1.8%/year, and labor-saving technological change of 1.0%/year. This scenario requires GDP to rise at 2.6%/year with a rapid export growth of 8.1%/year, accompanied by a 1.6%/year devaluation of the real exchange rate (Base column in Table 17.3). This rapid export growth is achieved in part by rapid increases in the volume of agricultural production (2.4-7.6%/year of the major agricultural enterprises), with consequent increases in farm incomes ranging from 3.8 to 5.7%/year.
The columns of Table 17.3 labeled Agric and Macro report projections Or the effects of a lower wheat yield and of a decline in world demand for Australian black coal, respectively. Values in these columns are to be interpreted as deviations from the base projections. These deviations were computed by assuming that none of the model's exogenous variables (e.g., aggregate employment or the change in the debt-GDP ratio at the end of the period) are affected by the shocks.
At the aggregate level, the assumed 1%/year wheat-yield-depressing effect of EGE reduces the GDP growth rate by 0.01%/year compared with the base case, depreciates the real exchange rate by a further 0.03%/year, reduces the growth in export volume by 0.02%/year, and marginally reduces the fall in the terms of trade by 0.01%/year (Agric column in Table 17.3). Extra real depreciation is required to eliminate the initial deleterious effects on the balance or trade of the Agric shock. Without this depreciation, the debt-GDP ratio would not he stabilized by 1994-l995; this stabilization is one of the exogenously imposed requirements of the projections. In the agricultural sector, the effect of EGE-induced wheat-yield decline is to reduce the rate of growth of wheat output by 1.7%/year, with substitution mainly by sheep and other grains (increasing their volume growth rates by 0.07 and 0.25%/year, respectively). Farm-operating surplus grows faster in zones growing little wheat (pastoral and high rainfall, 0.19%/year and 0.23%/year, respectively), and the growth of farm-operating surplus is reduced by 0.38%/year in the wheat-sheep zone. Agriculture- and forestry sector-output growth are reduced 0.08%/year by the wheat-yield decline.
The overseas imposition of carbon taxes, leading to a reduction in export demand for Australian black coal of 1%/year, has a GDP effect similar to that of declining wheat yield (Macro column in Table 17.3). The real exchange-rate effect is, however, much stronger: there is an additional 0.12%/year depreciation of the real exchange rate, with an associated increase in the rate of growth of export volumes of 0.09%/year. Because export demand for black coal is assumed to fall, the decline in the terms of trade is accentuated (an additional 0.12%/year). In the agricultural sector, the effects of the decline in export demand for coal are--except for wheat and other grains--much more dramatic than those caused by the wheat-yield decline. The growth rate of wool output increases by 0.22%/year over the base case (compared with 0.01%/year in the wheat-yield-decline scenario); sheep-output volume grows an additional 0.45%/year (cf. 0.07%/year), and beef-output volume grows an additional 0.14%/year (cf. 0.02%/year). The rate of growth of wheat-output volume is an additional 0.23%/year (compared with a reduction of 1.67%/year with wheat-yield decline), and the change in the growth rate of other grains is similar to that with wheat-yield decline. The growth rate of total agriculture- and forestry-sector output is increased 0.21%/year over the base case by the reduced export demand for black coal.
Because the ORANI model is linear, the combined effects of the simulated wheat-yield decline and carbon tax (Agric+Macro in Table 17.3) are estimated by adding corresponding values in the Agric and Macro columns. The combination of EGE effects through wheat-yield decline and carbon tax is favorable for the agriculture and forestry sector as a whole, and only has a net negative effect for that industry (wheat) and zone (wheat-sheep) directly disadvantaged by the wheat-yield decline. Because of ORANI's linearity, the results presented in Table 17.3 can also be used to estimate the consequences of any change that is a multiple of the assumed 1%/year change (all corresponding values in Table 17.3 sealed by relevant multiple), including beneficial effects (all corresponding values in Table 17.3 multiplied by -1)
In a multiproduct, multi-input production system, the key economic impacts or EGE to he identified are whether the result is equivalent to technological progress or regress, whether this technological effect is product- and/or input-neutral or biased, whether there is an effect on the substitution elasticities, or whether there are changes in functional form, leading to changes in the degree or elasticities or output supply or input demand. The agricultural impacts of EGE may be exacerbated by capital fixity and labor immobility, and exacerbated or ameliorated by decisions about the development of new technologies.
The agricultural impacts of EGE are not, however, solely confined to the physical environment of agricultural production. EGE or greenhouse induced policies may change the price of agricultural inputs, especially those that are energy-intensive. Aggregate supply effects within Australia, or in Australia's export competitors or importing countries, may affect the prices at which Australia's agricultural produce may be sold. Aggregate effects of EGE or greenhouse-induced policies in Australia or overseas may affect the exchange rate and, thus, border prices for agricultural commodities. Other macroeconomic variables, such as aggregate demand and wealth effects on consumption are less likely to have a significant impact on demand for Australian agricultural products. However, greenhouse-ameliorating policies may have substantial effects on investment-goods industries and the capital market and may thus have significant impacts on agricultural investment. The potential effects of EGE on agriculture, taking into account these nonagricultural effects, can only be modeled in a general-equilibrium framework.
Clearly, it is impossible to draw general conclusions from the simple EGE experiment reported in this paper. The results of the general-equilibrium modeling reported here, however, demonstrate that EGEs' damage to agriculture may be sufficiently Offset by EGE-induced impacts elsewhere in the economy and that agriculture may be a net gainer from EGE even if it is directly damaged and even if the economy as a whole is also damaged. A parenthetical caution might also be added: it is possible for agriculture to suffer net damage from EGE even if the biological effects of EGE are favorable for agriculture.
EGE can have many possible direct and indirect effects on agriculture other than wheat-yield decline and carbon taxes. It is therefore likely to be more profitable to refine estimates of EGE impacts on wheat yields and coal prices while modeling a much wider range of possible impacts of EGE on agriculture and variables affecting agriculture. We plan to expand this general-equilibrium modeling. It may be desirable to link national general equilibrium models of EGE directly to world-trade models, to assess simultaneously international and national effects of EGE. ORANI has already been linked in this way to examine agricultural trade reform (Horridge et al., 1990).
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