Agriculture and Climate Change: A Balancing Act

As we approach the United Nations Summit on Climate Change (COP26) in Glasgow, the build up has been anything but calm. The mounting pressure on Prime Minister Morrison from the UK and US [1] and the challenging speech by Greta Thunberg at the pre-COP26 meeting [2] has left no doubt that climate change and carbon neutrality are back under the spotlight, both in Australia and internationally. Now, as most developed countries overcome the coronavirus pandemic through vaccination and other measures, the debate around reducing carbon emissions and decelerating climate change takes centre stage, after all it is an overarching crisis. Due to the broad spectrum of measures taken to counter extreme climate change, it becomes all too easy to be dragged into its complexities. Policymakers tend to focus on every source of greenhouse gas emissions, pollution and environmental degradation. Similarly, there is a variety of industries where measures can be taken to reduce their negative impact on the planet. For example, generating electricity from renewable sources for consumption, using biodegradable packaging or implementing sustainable agricultural practices.

These measures, however, have a price tag: the marginal abatement cost (MAC). This is essentially the cost of reducing each additional unit of negative externality – consider this as Australian Dollar spent to reduce one tonne of CO2. Arguably, the industry with one of the highest abatement costs and cost of inaction is agriculture. The agriculture industry is unique in that as world’s population increases, we cannot survive without proportional increases in agricultural output: food. At the same time, agriculture contributes a significant amount towards emissions. In Australia, agricultural activities contributed 76.5 million tonnes – 15 per cent of total emissions – in 2019 [3]. This highlights the key challenge for policymakers who need to ensure food security for a population expected to hit 9 billion by 2050 [4] while also attempting to limit the GHG[1] emissions from agricultural activities.

The other side of the coin

Previously, we discussed the impact of agriculture and livestock on our environment and the challenges faced in that area with respect to demand. Now, we need to understand the second part of the problem which is the effect of the planet itself on agricultural land. According to the IPCC Special Report: Special Report on Climate Change and Land [5] around 380-620 million people lived in areas which experienced desertification from 1980-2000s with areas most impact being in developing countries – South and East Asia, Saharan and North African regions and the Middle East – which are far more reliable on agriculture than developed nations. Furthermore, this is only a small example of a plethora of challenges faced globally, from longer and more intense periods of extreme heat to changes in precipitation patterns and more. 

The big picture 

In summary, the aim of this discussion so far has been to draw attention to a negative feedback loop which exists between agricultural activity and the environment (see Figure 1). 

The figure shows multiple interactions between the key stakeholders. Firstly, the green arrows show a positive loop which captures the market model of the agriculture industry and consumers who demand the products. The blue arrow (resources such as water, land etc.) and the green arrow loop represent the private costs and benefits in the market which represent a standard constrained maximisation problem for the agricultural sector. In other words, agriculture firms maximise income and produce supply with limited resources and labour. The second loop represented by the red arrows shows the interactions between the agriculture sector and the environment. This captures the negative externalities borne by the environment (GHG emissions, soil erosion etc.) on one end. Also, it shows the adverse effect of those externalities on the agriculture sector (extreme weather events, water scarcity etc.) due to climate change. Hence, we can now see a more complete picture of the problem which needs to be solved and which is why the agriculture industry is a particular balancing act as it is directly impacted by the environment and the inelastic – and growing – demand for its products.

The Approach

Having discussed the challenges in detail, we can now ask: How do we approach this problem? The answer is indeed complex, but a starting point could be to incorporate the negative externalities and costs into the constrained optimisation model that firms implicitly solve when operating. For example, livestock breeders would have to consider the amount of methane and carbon dioxide produced by cattle and factor in the damage to the atmosphere around them. Conversely, consumers would the observe the increased cost of consuming meat and dairy products. The fundamental requirement for this process is pricing the value of the benefits derived from our planet which are often taken for granted which requires government intervention to correct the market failure. Thus, as discussed in the recent Grattan Institute report it is necessary for the government to include the agriculture sector in current and future net-zero emissions calculations.

Without a doubt, there are flaws in this approach as well since the overall impact of such market correction will likely lead to increase cost transfers to the consumers in form of mark-ups which would reduce affordability of necessities such as food and clothing which could exacerbate inequality in living standards. Hence, a measured approach with safety nets for impoverished and high-risk regions with equitable distribution of costs and benefits throughout the supply chains is necessary.

Conclusion

Agriculture is perhaps the oldest industry and a marker of civilisation, and its importance cannot be understated. Therefore, it is key that as we move forward to tackle the challenge of climate change, this important sector must also develop – globally – to become more productive and sustainable.

[1] Ludlow, M. (2021a, September 22). Australia under pressure to boost climate targets on path to 2050. Australian Financial Reviewhttps://www.afr.com/companies/energy/australia-under-pressure-to-boost-climate-targets-on-path-to-2050-20210914-p58rge#:%7E:text=Energy%20Minister%20Angus%20Taylor%20says,to%20satisfy%20the%20global%20community. Last Accessed: 30 Sept 2021

[2] McGrath, B. M. (2021, September 30). Climate change: Ministers meet in Milan for pre-COP26. BBC Newshttps://www.bbc.com/news/science-environment-58741704. Last Accessed: 30 Sept 2021

[3] Wood, T., Reeve, A., and Ha, J. (2021). Towards net zero: Practical policies to reduce agricultural emissions. Grattan Institutehttps://grattan.edu.au/report/towards-net-zero-practical-policies-to-reduce-agricultural-emissions/. Last Accessed: 30 Sept 2021

[4] How to Feed the World in 2050 (2009a). FAOhttp://www.fao.org/fileadmin/templates/wsfs/docs/expert_paper/How_to_Feed_the_World_in_2050.pdf. Last Accessed: 30 Sept 2021

[5] Special Report: Climate Change and Land. (2021) IPCChttps://www.ipcc.ch/srccl/. Last Accessed: 30 Sept 2021

FN:

[1] Green house gases