nep-ene New Economics Papers
on Energy Economics
Issue of 2010‒12‒04
23 papers chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Are Energy Efficiency Standards Justified? By Parry, Ian W.H.; Evans, David A.; Oates, Wallace E.
  2. US Residential Energy Demand and Energy Efficiency: A Stochastic Demand Frontier Approach By Massimo Filippini; Lester C Hunt
  3. Is There an Energy Paradox in Fuel Economy? A Note on the Role of Consumer Heterogeneity and Sorting Bias By Bento, Antonio M.; Li, Shanjun; Roth, Kevin
  4. A New Look at Residential Electricity Demand Using Household Expenditure Data By Fell, Harrison; Li, Shanjun; Paul, Anthony
  5. Une analyse économique de la production d'hydrogène à partir d'électricité éolienne pour des usages transport By Philippe Menanteau; Marie-Marguerite Quéméré; Alain Le Duigou; Sandra Le Bastard
  6. Effects of Increased Biofuels on the U.S. Economy in 2022 By Gehlhar, Mark; Somwaru, Agapi; Somwaru, Agapi
  7. Do Biofuel Subsidies Reduce Greenhouse Gas Emissions? By R. Quentin Grafton; Tom Kompas; Ngo Van Long
  8. Are Biofuels Good for African Development? An Analytical Framework with Evidence from Mozambique and Tanzania By Arndt, Channing; Msangi, Siwa; Thurlow, James
  9. On the relationship between forward energy prices: a panel data cointegration approach By Marc Joëts
  10. Calibration of One- and Two-Factor Models For Valuation of Energy Multi-Asset Derivative Contracts By Josh Gray; Konstantin Palamarchuk
  11. Monerary Policy Response to Oil Price Shocks By Natal, Jean-Marc
  12. A trend deduction model of fluctuating oil prices By Xu, Haiyan; Zhang, ZhongXiang
  13. Policy evaluation and uncertainty about the effects of oil prices on economic activity By Francesca Rondina
  14. Determinants of the Foreign Exchange Risk Premium in Gulf Cooperation Council Countries By Tigran Poghosyan
  15. Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resource Exporters in Latin America and the Caribbean By Pablo Lopez Murphy; Rolando Ossowski; Mauricio Villafuerte
  16. The Economics of Population Policy for Carbon Emissions Reduction in Developing Countrie By David Wheeler; Dan Hammer
  17. Global Income Distribution and Poverty: Implications from the IPCC SRES Scenarios By Alvaro Calzadilla
  18. Rents in the European Power Sector due to Carbon Trading. By Cruciani, Michel; Keppler, Jan Horst
  19. On fair pricing of emission-related derivatives By Juri Hinz; Alex Novikov
  20. The Impact of the European Union Emissions Trading Scheme on the Finnish Economy By Seiji Ikkatai; Ikuma Kurita; Katsuhiko Hori
  21. Observed and projected climatic changes, their impacts and adaptation options for Sri Lanka: a review By Eriyagama, Nishadi; Smakhtin, Vladimir
  22. Climate change, local institutions and adaptation experience: the village tank farming community in the dry zone of Sri Lanka By Senaratne, A.; Wickramasinghe, K.
  23. Climate Change, Irrigation and Pests: Examining Heliothis in the Murray Darling Basin By David Adamson

  1. By: Parry, Ian W.H. (Resources for the Future); Evans, David A.; Oates, Wallace E.
    Abstract: This paper develops and parameterizes an overarching analytical framework to estimate the welfare effects of energy efficiency standards applied to automobiles and electricity-using durables. We also compare standards with sectoral and economywide pricing policies. The model captures a wide range of externalities and preexisting energy policies, and it allows for possible “misperceptions”—market failures that cause underinvestment in energy efficiency.Automobile fuel economy standards are not part of the first-best policy to reduce gasoline: fuel taxes are always superior because they reduce the externalities related to vehicle miles traveled. For the power sector, potential welfare gains from supplementing pricing instruments with efficiency standards are small at best. If pricing instruments are not feasible, a large misperceptions failure is required to justify efficiency standards, and even in this case the optimal reductions in fuel and electricity use are relatively modest. Reducing economywide carbon dioxide emissions through regulatory packages (combining efficiency and emissions standards) involves much higher costs than pricing instruments.
    Keywords: standards, energy taxes, market failure, climate, power sector, gasoline
    JEL: Q48 Q58 H21 R48
    Date: 2010–11–23
  2. By: Massimo Filippini (Centre for Energy Policy and Economics (cepe), ETH Zurich and Department of Economics, University of Lugano); Lester C Hunt (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)
    Abstract: This paper estimates a US ‘frontier’ residential aggregate energy demand function using panel data for 48 ‘states’ over the period 1995 to 2006 using stochastic frontier analysis (SFA). Utilizing an econometric energy demand model, the (in) efficiency of each state is modelled and it is argued that this represents a measure of the inefficient use of residential energy in each state (i.e. ‘waste energy’). This underlying efficiency for the US is therefore observed for each state as well as the relative efficiency across the states. Moreover, the analysis suggests that energy intensity is not necessarily a good indicator of energy efficiency, whereas by controlling for a range of economic and other factors, the measure of energy efficiency obtained via this approach is. This is a novel approach to model residential energy demand and efficiency and it is arguably particularly relevant given current US energy policy discussions related to energy efficiency.
    Keywords: Energy demand; US residential energy demand; efficiency and frontier analysis; state energy efficiency.
    JEL: D D2 Q Q4 Q5
    Date: 2010–11
  3. By: Bento, Antonio M.; Li, Shanjun (Resources for the Future); Roth, Kevin
    Abstract: Previous literature finds that consumers tend to undervalue discounted future energy costs in their purchase decisions for energy-using durables. We argue that this finding could result from ignoring consumer heterogeneity in empirical analyses as opposed to true undervaluation. In the context of automobile demand, we show that, if not accounted for, consumer heterogeneity could lead to sorting, which in turn biases toward zero the estimate of marginal willingness to pay for discounted future fuel costs.
    Keywords: energy paradox, fuel economy, consumer heterogeneity
    JEL: Q48 L91
    Date: 2010–11–24
  4. By: Fell, Harrison (Resources for the Future); Li, Shanjun (Resources for the Future); Paul, Anthony (Resources for the Future)
    Abstract: We estimate residential electricity demand for different regions of the country, assuming that consumers respond to average electricity prices. We circumvent the need for individual billing information by developing a novel generalized method of moments approach that allows us to estimate demand based on household electricity expenditure data from the Consumer Expenditure Survey, which does not have quantity and price information. We find that price elasticity estimates vary across the four census regions—the South at –1.02 is the most price-elastic region and the Northeast at –0.82 is the least—and are essentially equivalent across income quartiles. In general, these price elasticity estimates are considerably larger in magnitude than those found in other studies using household-level data that assume that consumers respond to marginal prices. We also apply our elasticity estimates in a U.S. climate policy simulation to determine how these elasticity estimates alter consumption and price outcomes compared to the more conservative elasticity estimates commonly used in policy analysis.
    Keywords: residential electricity demand, consumer expenditure survey, generalized method of moments
    JEL: C5 D12 Q4
    Date: 2010–11–24
  5. By: Philippe Menanteau (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II); Marie-Marguerite Quéméré (EDF - EDF Recherche et Développement); Alain Le Duigou (CEA - CEA); Sandra Le Bastard (EDF - EDF)
    Abstract: L'électricité d'origine éolienne est souvent considérée comme une option particulièrement prometteuse pour la production d'hydrogène à partir d'énergies renouvelables mais les conditions économiques de cette production restent généralement assez floues. L'objet de ce papier est d'expliciter ces conditions en précisant les conditions d'utilisation de l'hydrogène produit. Les analyses présentées ici pour les usages transport font apparaître une grande variabilité des coûts de production de l'hydrogène selon les profils de demande considérés avec un net avantage pour les configurations limitant au maximum le recours à des dispositifs de stockage.
    Date: 2010–09
  6. By: Gehlhar, Mark; Somwaru, Agapi; Somwaru, Agapi
    Abstract: Achieving greater energy security by reducing dependence on foreign petroleum is a goal of U.S. energy policy. The Energy Independence and Security Act of 2007 (EISA) calls for a Renewable Fuel Standard (RFS-2), which mandates that the United States increase the volume of biofuel that is blended into transportation fuel from 9 billion gallons in 2008 to 36 billion gallons by 2022. Long-term technological advances are needed to meet this mandate. This report examines how meeting the RFS-2 would affect various key components of the U.S. economy. If biofuel production advances with cost-reducing technology and petroleum prices continue to rise as projected, the RFS-2 could provide economywide benefits. However, the actual level of benefits (or costs) to the U.S. economy depends importantly on future oil prices and whether tax credits are retained in 2022. If oil prices stabilize or decline from current levels and tax credits are retained, then benefits to the economy would diminish.
    Keywords: Bioenergy, economywide, ethanol, petroleum, trade, macroeconomic factors, RFS-2, Resource /Energy Economics and Policy,
    Date: 2010–10
  7. By: R. Quentin Grafton; Tom Kompas; Ngo Van Long
    Abstract: Conventional wisdom suggests that subsidising biofuel production will reduce greenhouse gas (GHG) emissions. This paper shows that in many cases, and for a wide range of parameter values, this is not true. Biofuel subsidies can generate supply-side response by fossil fuel producers that accelerates their rate of extraction, even in the case where fossil fuel extraction costs are stock dependent. Thus, policies designed to reduce GHG emissions may, perversely, hasten climate change.
    Date: 2010
  8. By: Arndt, Channing; Msangi, Siwa; Thurlow, James
    Abstract: Many low income countries in Africa are optimistic that producing biofuels domestically will not only reduce their dependence on imported fossil fuels, but also stimulate economic development, particularly in poorer rural areas. Skeptics, on the other hand, view biofuels as a threat to food security in the region and as a landgrabbing opportunity for foreign investors. As a result of this ongoing debate, national biofuels task forces have been asked to evaluate both the viability of domestic biofuels production and its broader implications for economic development. To guide these complex evaluations, this paper presents an analytical framework that prioritizes different aspects of a comprehensive national assessment and identifies suitable evaluation methods. The findings from recent assessments for Mozambique and Tanzania are used to illustrate the framework. While these two country studies found that biofuels investments could enhance development, their experiences highlight potential tradeoffs, especially at the macroeconomic and environmental levels, where further research is needed.
    Keywords: biofuels, economic development, food security, poverty, Africa
    Date: 2010
  9. By: Marc Joëts
    Abstract: The aim of this paper is to investigate the long-term relationship between the forward prices of crude oil and domestic fuel (FOD) on the period from August 2003 to April 2010. To this end, we rely on a panel data setting by considering a sample of 36 maturities for the forward prices. Using panel cointegration tests, our results show that oil and fuel prices are characterized by a strong homogeneous long-term equilibrium relationship for several maturities. Estimating a panel error correction model, we find that FOD prices are influenced by oil prices variations on both the short and the long run. The existence of a unique equilibrium model for all maturities may have important implications for financial arbitrage strategies based on energy prices relationships.
    Keywords: forward energy prices, oil, domestic fuel, panel cointegration
    JEL: C23 Q40
    Date: 2010
  10. By: Josh Gray; Konstantin Palamarchuk
    Abstract: We study historical calibration of one- and two-factor models that are known to describe relatively well the dynamics of energy underlyings such as spot and index natural gas or oil prices at different physical locations or regional power prices. We take into account uneven frequency of data due to weekends, holidays, and possible missing data. We study the case when several one- and two-factor models are used in the joint model with correlated model factors and present examples of joint calibration for daily natural gas prices at several locations in the US and for regional hourly power prices.
    Date: 2010–11
  11. By: Natal, Jean-Marc (Swiss National Bank)
    Abstract: How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring perfect price stability is optimal. Yet, the contrast between theory and practice is striking: Inflation targeting central banks typically favor a longer run approach to price stability. The first contribution of this paper is to show that because oil cost shares vary with oil prices, policies that perfectly stabilize prices entail large welfare costs, which explains the reluctance of policymakers to enforce them. The policy trade-off faced by monetary authorities is meaningful because oil (energy) is an input to both production and consumption. Welfare-based optimal policies rely on unobservables, which makes them hard to implement and communicate. The second contribution of this paper is thus to analytically derive a simple interest rate rule that mimics the optimal plan in all dimensions but that only depends on observables: core inflation and the growth rates of output and oil prices. It turns out that optimal policy is hard on core inflation but cushions the economy against the real consequences of an oil price shock by reacting strongly to output growth and negatively to oil price changes. Following a Taylor rule or perfectly stabilizing prices during an oil price shock are very costly alternatives.
    Keywords: optimal monetary policy; oil shocks; divine coincidence; simple rules
    JEL: E32 E52 E58
    Date: 2010–09–02
  12. By: Xu, Haiyan; Zhang, ZhongXiang
    Abstract: Crude oil prices have been fluctuating over time and by a large range. It is the disorganization of oil price series that makes it difficult to deduce the changing trends of oil prices in the middle- and long-terms and predict their price levels in the short-term. Following a price-state classification and state transition analysis of changing oil prices from January 2004 to August 2009, this paper first verifies that the observed crude oil price series during the soaring period follow a Markov Chain. Next, the paper deduces the changing trends of oil prices by the limit probability of a Markov Chain. We then undertake a probability distribution analysis and find that the oil price series have a log-normality distribution. On this basis, we integrate the two models to deduce the changing trends of oil prices from the short-term to the middle- and long-terms, thus making our deduction academically sound. Our results match the actual changing trends of oil prices, and show the possibility of re-emerging soaring oil prices.
    Keywords: Oil price; Log-normality distribution; Limit probability of a Markov Chain; Trend deduction model; OPEC
    JEL: Q41 C12 F01 O13 C49
    Date: 2010–08–19
  13. By: Francesca Rondina
    Abstract: This paper addresses the issue of policy evaluation in a context in which policymakers are uncertain about the effects of oil prices on economic performance. I consider models of the economy inspired by Solow (1980), Blanchard and Gali (2007), Kim and Loungani (1992) and Hamilton (1983, 2005), which incorporate different assumptions on the channels through which oil prices have an impact on economic activity. I first study the characteristics of the model space and I analyze the likelihood of the different specifications. I show that the existence of plausible alternative representations of the economy forces the policymaker to face the problem of model uncertainty. Then, I use the Bayesian approach proposed by Brock, Durlauf and West (2003, 2007) and the minimax approach developed by Hansen and Sargent (2008) to integrate this form of uncertainty into policy evaluation. I find that, in the environment under analysis, the standard Taylor rule is outperformed under a number of criteria by alternative simple rules in which policymakers introduce persistence in the policy instrument and respond to changes in the real price of oil.
    Keywords: model uncertainty, robust policy, Bayesian model averaging, minimax, oil prices.
    JEL: C52 E52 E58
    Date: 2010–11–24
  14. By: Tigran Poghosyan
    Abstract: This paper analyzes macroeconomic determinants of the foreign exchange risk premium in two Gulf Cooperation Council (GCC) countries that peg their currencies to the U.S. dollar: Saudi Arabia and the United Arab Emirates. The analysis is based on the stochastic discount factor methodology, which imposes a no arbitrage condition on the relationship between the foreign exchange risk premium and its macroeconomic determinants. Estimation results suggest that U.S. inflation and consumption growth are important factors driving the risk premium, which is in line with the standard C-CAPM model. In addition, growth in international oil prices influences the risk premium, reflecting the important role played by the hydrocarbon sector in GCC economies. The methodology employed in this paper can be used for forecasting the risk premium on a monthly basis, which has important practical implications for policymakers interested in the timely monitoring of risks in the GCC.
    Keywords: Consumption , Cooperation Council for the Arab States of the Gulf , Currency pegs , Economic models , Foreign exchange , Inflation , Oil prices , Risk premium , Saudi Arabia , United Arab Emirates , United States ,
    Date: 2010–11–11
  15. By: Pablo Lopez Murphy; Rolando Ossowski; Mauricio Villafuerte
    Abstract: This paper analyzes recent fiscal policies of nonrenewable resource exporting countries in Latin America and the Caribbean in the context of sharp swings in resource prices. Fiscal policies were predominantly procyclical during the boom period 2003-08 but to significantly differing degrees within the sample. Countries that pursued more conservative fiscal policies during the boom were then able to implement countercyclical fiscal policies during the downturn; moreover, they reduced or maintained their fiscal vulnerability to resource shocks, while their long-term fiscal sustainability positions improved or were broadly unchanged. However, these dimensions of fiscal policy did not seem to be linked to fiscal rules or resource funds, as countries with such institutions displayed a broad range of fiscal responses to the recent cycle.
    Keywords: Business cycles , Caribbean , Commodity price fluctuations , Cross country analysis , External shocks , Fiscal policy , Fiscal sustainability , Latin America , Natural resources , Oil exporting countries ,
    Date: 2010–11–09
  16. By: David Wheeler; Dan Hammer
    Abstract: Female education and family planning are both critical for sustainable development, and they obviously merit expanded support without any appeal to global climate considerations. However, even relatively optimistic projections suggest that family planning and female education will suffer from financing deficits that will leave millions of women unserved in the coming decades. Since both activities affect fertility, population growth, and carbon emissions, they may also provide sufficient climate-related benefits to warrant additional financing from resources devoted to carbon emissions abatement. This paper considers the economic case for such support. [Working Paper No. 229]
    Keywords: Female, education, family, planning, sustainable development, fertility, population growth,
    Date: 2010
  17. By: Alvaro Calzadilla
    Abstract: The Special Report on Emissions Scenarios (SRES) has been widely used to analyze climate change impacts, vulnerability and adaptation. The storylines behind these scenarios outline alternative development pathways, which have been the base for climate research and other studies at global, regional and country level. Based on the global income distribution and poverty module (GlobPov), we assess the implication of the IPCC SRES scenarios on global poverty and inequality. We find that global poverty and inequality measures are sensitive to the downscaling methodology used. Our results show that future economic growth is crucial for poverty reduction. Higher per capita incomes tend to favour poverty reduction, while higher population growth rates delay this progress. Scenarios that combine high economic growth and convergence assumptions with low population growth rates produce better outcomes. China and India play a central role on poverty reduction and global inequality. While high economic growth rates in China and India may lift millions out of poverty, high population growth and stagnation in African economies could offset the situation
    Keywords: Global, poverty, income distribution, inequality, emission scenarios
    JEL: O50 I32 O15 Q54
    Date: 2010–11
  18. By: Cruciani, Michel; Keppler, Jan Horst
    Abstract: The European Union Emissions Trading Scheme (EU ETS) has imposed a price on the allowances for CO2 emissions of electricity companies. Integrating this allowance price into the price of electricity earns a rent for companies who have received these allowances for free. During Phase I, 2005–2007, rents corresponding to the aggregate value of allocated allowances amounted to roughly € 13 billion per year. However, due to the specific price-setting mechanism in electricity markets true rents were considerably higher. This is due to the fact that companies also that have not received any allowances gain additional infra-marginal rents to the extent that their variable costs are below the new market price after inclusion of the allowance price. Producers with low carbon emissions and low marginal costs thus also benefit substantially from carbon pricing. This paper develops a methodology to determine the specific interaction of the imposition of such a CO2 constraint and the price-setting mechanism in the electricity sector under the assumption of marginal cost pricing in a liberalized European electricity market. The article thus provides an empirical estimate of the true total rents of power producers during Phase I of the EU-ETS (2005–2007). The EU ETS generated in Phase I additional rents in excess of € 19 billion per year for electricity producers. These transfers are distributed very unevenly between different electricity producers. In a second step, the paper assesses the impact of switching from free allocation to an auctioning of allowances in 2013. We show that such a switch to auctioning will continue to create additional infra-marginal rents for certain producers and will leave the electricity sector as a whole better off than before the introduction of the EU ETS.
    Keywords: Carbon allowances; Electricity Market; European Union Carbon Trading Scheme;
    JEL: L94 Q48
    Date: 2010
  19. By: Juri Hinz; Alex Novikov
    Abstract: Tackling climate change is at the top of many agendas. In this context, emission trading schemes are considered as promising tools. The regulatory framework for an emission trading scheme introduces a market for emission allowances and creates a need for risk management by appropriate financial contracts. In this work, we address logical principles underlying their valuation.
    Date: 2010–11
  20. By: Seiji Ikkatai (Institute of Economic Research, Kyoto University); Ikuma Kurita (Institute of Economic Research, Kyoto University); Katsuhiko Hori (Institute of Economic Research, Kyoto University)
    Date: 2010–11
  21. By: Eriyagama, Nishadi; Smakhtin, Vladimir
    Abstract: Climate is changing world-wide, and the science community in Sri Lanka has come up with ample evidence to suggest that the country’s climate has already changed. During 1961-1990 the country’s mean air temperature increased by 0.016 0C per year, and the mean annual rainfall decreased by 144 mm (7 %) compared to the period 1931-1960. In addition, mean annual daytime maximum and mean annual night-time minimum air temperatures increased. However, the bigger question of national importance is what Sri Lanka’s climate will look like in 50 or 100 years and how prepared is the country to face it. Apart from the Intergovernmental Panel on Climate Change (IPCC) projections at the coarse global scale, few studies have attempted to project future climate scenarios for Sri Lanka and to identify climate change impacts on agriculture, water resources, the sea level, the plantation sector, the economy and health. Vulnerability and adaptation to climate change are the least studied areas. This paper reviews the status of climate change research and activities in Sri Lanka with respect to future climate projections, impacts, climate change mitigation and the country’s ability to adapt, and identifies existing knowledge gaps. Messages emerging from this review suggest that Sri Lanka’s mean temperature during the North-East (December-February) and South-West (May-September) monsoon seasons will increase by about 2.9 0C and 2.5 0C, respectively, over the baseline (1961-1990), by the year 2100 with accompanying changes in the quantity and spatial distribution of rainfall. Extreme climate events are expected to increase in frequency. These changes will bring about widespread impacts on the country’s agriculture and economy For example, an increase of 0.5 0C in temperature can reduce rice yield by approximately 6%; extended dry spells and excessive cloudiness during the wet season can reduce coconut yield resulting in annual losses between $32 and $73 million to the economy. Pilot studies in the Galle District suggest that sea level rise could inundate about 20 % of the land area of Galle’s coastal District Secretariat Divisions. Adaptation measures already undertaken in the agriculture sector include the development of low water consuming rice varieties and the use of micro-irrigation technologies. Tools have been developed for predicting seasonal water availability within the Mahaweli Scheme and annual national coconut production. However, Sri Lanka is yet to undertake a comprehensive national study on the vulnerability of her water resources and agriculture to climate change. The formulation of detailed and reliable future climate scenarios for the country is therefore, urgently required.Length: pp.99-117
    Keywords: Climate change; Impact assessment; Water resources; Agriculture; Adaptation
    Date: 2010
  22. By: Senaratne, A.; Wickramasinghe, K.
    Abstract: Farmers are in a continuous process of, individually and as community groups, adjusting to the observed variability in climate parameters. Climate shocks are considered by farmers in their decision-making as factors affecting risk and uncertainty, and farmers make their choices so as to minimize such risks. The overall outcome of these individual and community efforts is known as ‘climate adaptation’, which itself is a continuous process. Farmers are traditionally supported by local institutions in this process, which are also currently in a state of transformation. This study examines the climate adaptation responses of the village tank farming community in the dry zone of Sri Lanka in the context of transforming socioeconomic conditions and with the objective of identifying policy implications for adaptation to global climate change. The study was conducted in six Divisional Secretariat areas in the Anuradhapura District of the North Central Province. Both, primary and secondary data was collected in the study. The major sources of primary data included a series of focus group discussions and key informant interviews conducted with village tank farmers and local officers. The findings reveal that there are two major forms of voluntary adaptation responses by farmers against climate shocks: 1) aligning of farming activities with the recognized seasonal pattern of rainfall; and 2) management of rain water harvested in commonly owned village tanks. Farmers’ adaptation responses have been facilitated by local institutions that helped to adopt joint adaptation responses. However, recent socioeconomic dynamics introduced by rapid population increase, spread of commercial opportunities and change in agricultural technology have drastically altered conditions in the village tanks in favor of developing a commercial farming system. As a result, local institutions that traditionally facilitated the climatic adaptation responses are also in a state of transition. Therefore, farmers face problems in adapting to the impending risks and uncertainties of global climate change. The paper emphasizes the need for appropriate policy measures to facilitate the adaptive capacity of farmers.Length: pp.147-156
    Keywords: Climate change; Adaptation; Farmers; Arid lands; Villages; Tanks; Common property
    Date: 2010
  23. By: David Adamson (Risk and Sustainable Management Group, University of Queensland)
    Abstract: Helicoverpa spp. (heliothis) are a major insect pest of cotton, grains and horticulture in the Murray‐ Darling Basin. Climate change is likely to make conditions more favourable for heliothis. This could cause regional comparative advantages in irrigation systems to change as management costs increase and yields decrease. Irrigation in the Murray Darling Basin produces 12 percent of Australia’s total gross value of agricultural production. If producers fail to consider climate change impacts on heliothis they may misallocate resources.Adamson et al. (2007 and 2009) have used a state contingent approach to risk and uncertainty to illustrate how producers could allocate irrigation resources based on climate change impacts on water resources. This is achieved by separating environmental risks and uncertainties into defined states of nature to which the decision makers have a set of defined responses. This approach assumes that the decision makers can achieve optimal allocation of resources as they have perfect knowledge in how they should respond to each state of nature (i.e. producers know how to manage heliothis now). Climate change brings a set of new conditions for which existing state parameters (mean and variance) will alter. Consequently a decision maker will have incomplete information about the state description; and the relationship between state allocable inputs and the associated state dependent output, until they have experienced all possible outcomes. Therefore if producers ignore climate changes to heliothis they may lock in resources that may prove to be unprofitable in the long run. The purpose of this paper is to suggest a framework that could be used for determining climate change impacts of heliothis (i.e. density), illustrate that management costs rise as density increases and how a stochastic function could deal with incomplete knowledge in a state contingent framework.
    Keywords: Murray Darling Basin, Heliothis, Irrigation
    Date: 2010–11

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