CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENT
$4.9 billion. HadGEM and GISS results provide upper and lower bounds at $9.3 billion and $17 million, respectively, the equivalent of approximately $2.3 billion and $4 million, respectively, in today’s economy.
The GISS model yields weather patterns with significantly smaller increases in temperature and significantly more precipitation than HadGEM given the same emissions pathway. The GISS model also provides weather data at a coarser spatial resolution, but the possible effect of differences in resolution on modeled yield variability, if any, still needs to be explored. Excluding GISS results would push the total estimated increase in premium subsidies from $4.2 billion to $5.2 billion. In addition, if global crop demand growth is appreciably higher than assumed, the upper bound could reach into the tens of billions each year.
The increase in subsidy costs across the GCMs is driven by an increase in total premiums predominantly due to both higher yield risk in most regions and higher price risk faced by all producers due to climate change, as well as an increase of about 5 percent in the value of production compared to the reference scenario. However, a few additional factors also affect costs. First, to maintain expected profits despite shifting climate conditions, the land allocation model predicts that risk-neutral producers will adapt in some cases by expanding acreage into higher risk areas that produce a higher expected return under climate change but also have higher premium rates per dollar of revenue insured. Second, as explored in greater detail in Marshall et al. (2015), climate change leads to less irrigated area in most regions. This result tends to increase premium rates as dryland production is generally costlier to insure per unit of production (because irrigation is itself a form of insurance). Finally, acreage shifting between crops due to climate change in some areas may have the effect of reducing producers’ crop diversification, thereby increasing the risk of total revenue losses.
Changes in Mean and Standard Deviation of Calibrated Soybean Yield by REAP Region for RCP 8.5
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