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Abstract
Climate change poses serious threats to agricultural sector of many developed and
developing countries. The changes in temperature and rainfall patterns may lead to
sizeable losses in agricultural production which in turn may lead to food insecurity
of masses in many countries. Climate change is also expected to affect the supply of
natural resources including water, forests, ecological resources, land use
management, biodiversity, pest, diseases and exotic organisms and costal and marine
environments. These wide spread impacts of climate change urge for a timely and
collective response on global scale. The concern over climate change has been
reflected in number of climate change agreements. Most significant in this regard are
the establishment of United Nations Framework Convention on Climate Change, the
Kyoto Protocol and the Paris Agreement.
*
Raza Ullah
Department of Agricultural and Applied Economic, The University of Agriculture, Peshawar, Pakistan.
For Correspondance: raza_khalil@yahoo.com
Farhana Gul
Department of Agriculture, University of Swabi, Swabi, Pakistan.
153
154 R. Ullah and F. Gul
8.1 Introduction
The issues related to climate change and its potential impacts on human lives are
echoing strongly around the globe. The potential impacts of climate change on
agricultural production is of interest for researchers and policy makers as it may
threaten the food security of masses depending directly or indirectly on this sector of
the economy. This chapter is aimed at highlighting the concept of climate change,
climatic risks and related issues on agricultural sector of Pakistan. The chapter starts
with background of climate change, science and economics of climate change, and
proceeds to the climatic risks and uncertainties and their impacts in agriculture. The
market and non-market valuation techniques of natural resources and environment
are provided in the third section while the climate change agreements are listed in
the final section of this chapter.
century and based on scientific evidences it is predicted that the sea level
may rise to 59 cm during 21st century.
iv. Melting of Arctic Sea Ice
Global warming reduces the summer thickness of sea ice to about 50% of
what it was in 1950. This melting ice may affect the water circulation of
ocean and speed up warming of Arctic water.
purchases and land leases, and political instability due to internal and/or
external factors.
v. Human or Personal risk is related to death, illness or injury of the farm
owner/operator and/or the farmers labor force. Human or personal risk can
be caused by major life crises such as farm owners death, or the separation
of individuals who co-own the farm enterprise such as diverse of a husband
and wife, prolonged illness of one of the principals, and carelessness in
handling livestock or using machinery, causing injury.
head of livestock (excluding poultry) were perished in the catastrophe (Ullah et al.
2016). Again in 2011 the massive flood struck and severely affected Sindh and
Balochistan provinces. The impact was significant on peoples lives in both
provinces, particularly for those whose livelihoods were related to agriculture sector.
Standing crops on about 0.84 million hectares were destroyed in the flood. Similarly,
heavy losses in livestock sub-sector were also reported. The number of livestock
heads perished in the calamity were reported to be 115,500 while approximately 5
million surviving animals were directly affected. The total economic cost of floods
was estimated at $ 1,840.3 million (Ibid 2016).
compensate growers for crop losses. A specific form of weather insurance is rainfall
insurance which compensate farmers in the event of heavy rainfalls. In both weather
insurance and crop insurance, agricultural producers pass risk in yield to another
party for a premium however these two differ in the sense that weather insurance is
not yield insurance while crop insurance is.
Agriculture is vulnerable and subjected to volatility of nature. The impact of natural
disasters is significant particularly on small farmers. Farmers bear the loss of their
crop and face debt defaults. Hence, there is a stronger need to protect the interests
and investments of farmers by crop insurance. Crop insurance is used by farmers,
ranchers and others to protect themselves from losses arising mainly due to natural
disasters including hail, droughts, floods and pest and diseases attacks (SBP 2008).
Crop insurance is also helpful in promoting the adoption of modern production
practices and techniques in agriculture particularly by small holders. Crop Loan
Insurance Scheme (CLIS) in Pakistan is an example of this.
In July 2006, the State Bank of Pakistan (SBP) formed a task force to develop a
feasible Crop Loan Insurance Scheme with the help of all stakeholders to mitigate
the risk of losses to agricultural borrowers resulting from natural disasters and
catastrophes. Based on the report of task force the SBP decided to launch crop
insurance scheme from Rabi season (mid-October) 2008. The scheme was first
launched by The Bank of Punjab (BoP) and two insurance companies of the national
level (The United Insurance Company of Pakistan Ltd. and East West Insurance
Company Ltd.). The scheme compensates farmers with 1-50 acres of land in the
event of natural catastrophe. The farmers are paid 50 to 70% of the crop value and
their entire loans are covered. In 2009, Zari Taraqiati Bank Ltd. (ZTBL) and National
Bank of Pakistan (NBP) jointly launched Crop Loan Insurance Scheme (CLIS) which
cover five major crops (wheat, rice, sugarcane, maize and cotton). Presently, the crop
insurance scheme has been launched by almost all commercial banks which provide
agricultural loans (Ullah 2014).
However, markets for insurance and credit are usually incomplete or absent in
developing countries, which make it difficult to separate production and consumption
decisions. Besides government intervention to assist farmers in managing
agricultural risk, agricultural insurance is still relatively underdeveloped in Pakistan
and majority of the farmers are stick to the use of traditional ways of managing
agriculture risk. These traditional climatic risk management tools are summarized as
follow;
production and other chemicals may be regularly used, though not always
required.
b. Enterprise and/or geographical diversification: Diversification is a tactic
long used by farmers to cope with price or weather stimulated production
variability. Diversifying farm activities are regarded as farmers rationale
choice to create value from various functions of farming either through
markets (e.g., agri-tourism or organic agriculture) or through participation
to policy programs (Finocchio and Esposti 2008). Producers can diversify
by engaging in many different activities in one time period, engaging in the
same activity in many different physical environments or locations, or
engaging in the same activity over many consecutive periods of time.
Growing several varieties of a crop may reduce possible losses from
weather, insects and diseases. Dispersion of cropland over a wide
geographic area is another form of diversification. This strategy helps
minimize losses associated with highly localized, severe storms and other
hazardous events.
ii. Marketing Responses to Risk
Marketing responses are mostly used to cope with the uncertainties arising from
fluctuating input/output prices and market failures. However, some of the
marketing responses are also useful in combating the climatic risks. The main
aim of using these risk coping tools is to transfer risk to others by bearing some
cost (risk management cost). These include;
a. Option Trading: Under option trading the buyer have the right, but not the
obligation, to buy or sell an underlying asset at a particular price on or before
a certain date.
b. Forward Contracting: A form of non-standardized contract where two
agents or parties can buy or sell an asset at a specified future time and at an
agreed upon price which make forward contracting a form of derivative
instrument. Farmers use forward contracting to transfer the risk of climatic
factors to the contractor. However, a proportion of potential gains/benefit in
this transaction is lost by the farmers by agreeing on a lower price which can
be referred to as the cost of risk management. The contractor gains from the
risk involve in the production process.
iii. Financial Responses to Risk
Financial responses to risk normally affect the firm's solvency (debt/equity ratio)
or liquidity positions. The most important financial responses of farmers to risk
consist of the following.
a. Assets Accumulation: It may be very useful for farmers to retain liquid
assets, which can be converted to other uses simply without incurring
additional time and cost. Farmers generally hold cash and some liquid assets
(e.g. grain, forage, livestock ready for slaughter) that can be converted to
cash without impairing the ongoing operation.
8. Impacts of Climate Change on Agriculture and Natural Environment 169
b. Credit Reserves: A credit reserve is the difference between the total loan
amount available to the farmer and amount actually used. Holding credit
reserves is a mean of avoiding the losses from liquidating useful tools to
meet current cash obligations and reacquiring those tools after hostile
situation is over. However, the costs of maintaining and borrowing from
credit reserves must be considered (Barry et al. 1981) as in most cases the
opportunity cost in terms of return on foregone investment are higher
compared to direct cost of holding credit reserves.
and natural resources comprised of use values and non-use values. The use value
comprised of direct use value, indirect use value and option value while non-use
value comprised of altruism/bequest value and existence value. The use values and
non-use values are summarized in Table 8.1.
loggers. Computing these trade-offs is challenging mainly due to the fact that benefits
derived from the environmental assets are difficult to value particularly those which
are not reflected in market prices also known as non-market values. Valuation of the
environmental outcomes in such situation may help in making trade-offs in a more
careful way. Dollar values are sometimes used, not to monetize nature but to help
determine whether holding more of one good is better than having more of some
other good particularly in a state where a choice must be made.
There are two broad categories of natural resources and environment valuation.
These are i) market-based valuation and ii) non-market valuation. These are
discussed in detail as follow;
however, there is now wider consensus that these methods can be designed to
appear consequential rather than purely hypothetical.
Table 8.2 UNFCCC Conference of the Parties (COPs) Meetings since 1995
COP # Venue Date
8. Impacts of Climate Change on Agriculture and Natural Environment 175
prospects, in countries listed in Annex B, those are yet to become fully eligible to
engage in the Emissions Trading mentioned above.
Clean Development Mechanism (CDM): Under CDM countries listed in Annex B
can invest in projects aiming at emissions reduction in non-Annex B countries
particularly in developing countries to earn certified emissions reductions (CERs)
which can be used to meet the obligations of assigned amount. Though the US has
not signed the Protocol, yet some of the American states are using these trading
facilities to meet the goals.
The Kyoto protocol has been surrounded by some critiques including the overly stern
emissions reduction targets and the lack of long run vision for action. The legally
binding emissions limits, a central attribute of the protocol is criticized as such limits
are not self-imposing. The protocols project-based mechanisms for promoting
emissions reduction in developing world are also highly bureaucratic and
cumbersome. Another major criticism on the protocol is the lack of imposition of
mandatory emissions limits for developing nations. The developing nations
collectively are likely to meet developed nations in greenhouse gas emission by 2035.
8.13 Conclusion
Climate change and related hazards possess serious threats to every sector of the
economy. Agricultural sector in particular, is extremely vulnerable to changes in
climatic parameters as agricultural activities are largely exposed to and depend upon
the natural environment. These hazards cause yield losses of agricultural products
and threaten the food security of masses depending upon farm sector. Climate change
is also expected to affect other natural resources including water resources, forest
lands, ecological resources, air quality sustainable land use and management,
biodiversity, pests, diseases and exotic organisms and coastal and marine
environments. Therefore, there is a stronger need to understand climate change
impacts, its mitigation measures and significance of adoption and adaptation. To
better understand the impact of climate change on natural resources, there is a need
to establish ways to quantify environmental resources. The two common valuation
techniques are market and non-market valuation of natural resources. Farmers adopt
formal and informal (traditional) tools to mitigate, share, transfer and/or take climatic
risks at farm level. The global concern over climate change has been reflected in
number of climate change agreements. Most significant in this regard are the
establishment of United Nations Framework Convention on Climate Change, the
Kyoto Protocol and the Paris Agreement.
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