Climate change adaptation in agriculture: A general equilibrium analysis of land re-allocation in Nepal

Despite the growing body of literature on the economic impact of climate change, quantification of climate-change adaptation practices is limited. Therefore, this paper investigates the feasibility of crop land re-allocation as an adaptation strategy to minimise the economy-wide costs of climate change on agriculture in Nepal by developing a multi-household Computable General Equilibrium (CGE) model. Nepal makes an interesting case study as it is one of the most vulnerable agricultural economies within South Asia. Top-down CGE models are often used in economy-wide investigations because they enable researchers to evaluate the overall impact of climate change, including income distribution and employment. Operating at the micro-level, individual farmers and households in developing countries make most of the land-use decisions to adapt to the threats of climate change. Therefore, this paper attempts to map these decisions by using a simple model designed specifically for the Nepalese economy that modifies the ORANI-G generic CGE model (Dixon et al, 1982). Specifically, the model modifies the widely assumed “fixed land supply for a given industry” by allowing farmers to supply land to crops that are less affected by climate change subject to any agronomic constraints. Using Constant Elasticity of Transformation (CET) functions to model the allocation of land allows one to recognise the ease of switching from one crop to another based on their agronomic constraints. For the paper, a nested set of CETs with different transformation elasticities is developed and tested. The sensitivity of the CET values is analysed and a framework of beneficial practices in land re-allocation is recommended. The results suggest that, in the long run, farmers in Nepal tend to allocate land to crops that are comparatively less impacted by climate change, such as paddy, thereby minimizing the economy-wide impacts of climate change. Furthermore, re-allocating land from crops that are highly impacted by climate change to those that are not tends to reduce the income disparity among different household groups by significantly moderating the income losses of rural marginal farmers. Therefore, it is suggested that policy makers in Nepal should prioritise schemes such as providing climate-smart paddy varieties (i.e., those that are resistant to heat, drought and floods) to farmers, subsidising fertilizers, improving agronomic practices, and educating farmers to switch from crops that are highly impacted by climate change to those that are not, such as paddy.