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Environmental Economics Seminar: The Impacts of Climate Change on US Agriculture: Accounting for the Option Value of Farmland in the Ricardian Approach

Date and Time

Thursday 06/08/2017 6:00PM to 7:30PM EDT
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Room 4128, William Jefferson Clinton West Building
1301 Constitution Ave., NW
Washington, DC 20001


Contact: Carl Pasurka, 202-566-2275

Presenter: Ariel Ortiz-Bobea (Charles H. Dyson School of Applied Economics and Management, Cornell University)

Description: The Ricardian (hedonic) analysis of climate change impacts on agriculture typically relies on a cross-sectional regression of farmland values on climate variables. While the price of farmland may reflect agricultural rents, it also generally embodies the option value of alternative non-farm uses of the land. In this paper, I illustrate how expected land use change can operate as an influential omitted variable in benchmark Ricardian models based on farmland values. In the US context, I find that benchmark Ricardian estimates are increasingly biased downward over time as housing market pressures spill over into farmland markets. The result cannot be reasonably explained by other factors including measurement error or structural changes in agriculture. To circumvent biases associated with development pressure, I propose a slightly revised model based on alternative dependent variables that reflect agricultural rents of the land but not their option value. New Ricardian estimates based on the rental price of non-irrigated cropland point to small and statistically insignificant impacts of climate change on US crop agriculture. Because non-irrigated crop agriculture is arguably the most climate-sensitive agricultural activity, these findings point to a neutral but cautionary outlook for US agriculture under climate change.