Implications for the Iranian economy from climate change effects on agriculture—a static computable general equilibrium approach

Abstract   

Agricultural sectors worldwide are under direct threat from climate change conditions. In Iran, agricultural production has decreased due to droughts originating in an increase in annual maximum temperatures—with the corresponding increase in crop respiration and evapotranspiration—and a decrease in accumulated precipitation. Based on a static computable general equilibrium approach, this paper reports implication for the Iranian economy from the effects of climate change on agriculture––as modeled through three scenarios relying on assumptions about the magnitude of continued reduction in total agricultural production. Reductions of 6%, 12%, and 18% in total agricultural production reasonably cover the range of impacts that climate change is expected to impose on the Iranian agricultural sector––under the assumption that no behavioral adaptations or policy interventions are in place. Our simulations suggest that effects on the Iranian economy imply a reduction in GDP ranging between 3.7 and 6.3%. In addition, 5–17% of labor moves away from the agriculture sector––this labor relocation occurs due to declining agriculture incomes. Findings illustrate that climate change will reduce households’ consumption and income in all economic sectors, particularly among rural households. We suggest that policies in Iran should focus on improving cultivation methods to save water resources and alleviate the expected effects of climate change. The current study's outcomes are helpful for policymakers, especially in countries with water scarcity.

Appendices

Appendix: Description of the CGE model

VARIABLES

EXR:

Exchange rate

HSAV:

Household savings

GSAV:

Government savings

MPS_hMPS_h:

Marginal propensity to save for domestic nongovernment institution

PA_a:

Price of activity a

PD_c:

Domestic prices

PM_c:

Domestic price of imports

PE_c:

Domestic price of exports

PQ_c:

Price of composite goods

PDD_c:

Demand price for commodity produced and sold domestically,

PVA_a:

Value added price by sector

PX_c:

Average output price by sector

PDS_c:

Supply price for commodity produced and sold domestically.

PXAC_ac:

Producer price of commodity c for activity a,

QA_a:

Level of activity a

QVA_a:

Value added quantity by sector

QD_c:

Domestic sales

QE_c:

Exports by sector

QM_c:

Imports

QQ_c:

Composite goods supply

QX_c:

Domestic output by sector

QF_fa:

Quantity demand of factor f from activity a

QFS_f:

Labor supply by labor category (1000 persons)

QH_ch:

Final demand for private consumption

QINT_ca:

Intermediate uses

QINV_c:

Final demand for productive investment

WF_f:

Average wage rate by labor category

WDIST_fa:

Age distortion factor for factor f in activity a

YENT:

Institutions income

YFh_f:

Transfer of income to household from factor f

YH_h:

Household income

YF_e:

Transfer of income to ins from factor parameters

pwm_c:

World price of import for commodity c

tm_c:

Import tariff rate

pwe_c:

f.o.b. export price

te_c:

Export tax rate

tq_c:

Rate of sales tax (as share of composite price inclusive of sales tax)

θ_ac:

Yield of output c per unit of activity a

ta_a:

Tax rate for activity

ica_ac:

Quantity of c per unit of aggregate intermediate input a

a_a^a:

Efficiency parameter in the CES activity function,

δ_a^a:

CES activity function share parameter,

p_a^a:

CES activity function exponent

tva_a:

Rate of value-added tax for activity a

δ_f^vaa:

CES value-added function share parameter for factor f in activity a

ρ_a^va:

CES value-added function exponent

inta_a:

Quantity of aggregate intermediate input per activity unit

aq_c:

An Armington function shift parameter

δ^q_c:

An Armington function share parameter

ρ^q:

An Armington function exponent

at_c:

A CET function shift parameter

δ_c^t:

A CET function share parameter

ρ^t_c:

A CET function exponent

shry_hf:

Share of household income from each factor

trrr_f:

Transfer rate of factor

tr_h,ins:

Transfer from household to institution

β_ch:

Marginal share of consumption spending on marketed commodity c for household h

ty_h:

Income tax rate

sh_h:

Share of transfers of households to other institutions

trgov,row:

Transfers from Rest of the World to the government

trgov,insd:

Transfer from government to domestic institution

shry_ent,f:

Share of enterprises income from each factor

tr_ent,insd:

Transfer between enterprises and domestic institution

tr_ent,row:

Transfer between enterprises and rest of the world

EQUATIONS

• 1) ${PM}_{c}={pwm}_{c}. \left(1+ {tm}_{c}\right). EXR$

• 2) ${PE}_{c}={pwe}_{c}.\left(1-{te}_{c}\right). EXR$

• 3) ${PQ}_{c}.{QQ}_{c}={PDD}_{c}.{QD}_{c}+{PM}_{c}.{QM}_{c}\left(1+{tq}_{c}\right)$

• 4) ${PX}_{c}.{QX}_{c}={PDS}_{c}.{QD}_{c}+{PE}_{c}.{QE}_{c}$

• 5) ${PA}_{a}= \sum_{\mathrm{c}\in \mathrm{C}}{PXAC}_{ac}. {\theta }_{ac}$

• 6) ${PVA}_{a}={PA}_{a}.\left(1-{ta}_{a}\right).{QVA}_{a}-\sum_{c}{ica}_{ac}.{PQ}_{c}$

• 7) ${QA}_{a}={\alpha }_{a}^{a}.({\delta }_{a}^{a}.{QVA}_{a}^{-{\rho }_{a}^{a}}+\left(1-{\delta }_{a}^{a}\right).{QINTA}_{a}^{-{\rho }_{a}^{a}}{)}^{-\frac{1}{{\rho }_{a}^{a}}}$

• 8) $\frac{{QVA}_{a}}{{QINTA}_{a}}=({\frac{{PINTA}_{a}}{{PVA}_{a}}.\frac{{\delta }_{a}^{a}}{1-{\delta }_{a}^{a}})}^{\frac{1}{1+{\rho }_{a}^{a}}}$

• 9) ${QVA}_{a}={\alpha }_{a}^{va}.(\sum_{f\in F}{\delta }_{fa}^{va}.{QF}_{fa}^{-{\rho }_{a}^{va}}{)}^{-\frac{1}{{\rho }_{a}^{va}}}$

• 10) ${WF}_f.{\overline{WFDIST}}_{fa}={PVA}_a\left(1-{tva}_a\right).{QVA}_a.(\sum_{f\in\dot F}\delta_{fa}^{va}.{QF}_{fa}^{-\rho_a^{va}})^{-1}.\delta_{fa}^{va}.{QF}_{fa}^{-\rho_a^{va}-1}$

• 11) ${QINT}_{ca}={ica}_{ca}.{QINTA}_{a}$

• 12) ${QX}_{c}=\sum_{a}{\theta }_{ac}.{QA}_{a}$

• 13) ${QQ}_{c}={aq}_{c}.({\delta }_{c}^{q}.{QM}_{c}^{{\rho }^{q}}+(1-{\delta }_{c}^{q}).{QD}_{c}^{{\rho }^{q}}{)}^{-\frac{1}{{\rho }_{c}^{q}}}$

• 14) $\frac{{QM}_{c}}{{QD}_{c}}=(\frac{{PD}_{c}}{{PM}_{c}}.\frac{{\delta }_{c}^{q}}{1-{\delta }_{c}^{q}}{)}^{\frac{1}{1+{\rho }^{q}}}$

• 15) ${QQ}_{c}={QD}_{c}+{QM}_{c}$

• 16) ${QX}_{c}={at}_{c}({\delta }_{c}^{t}.{QE}_{c}^{{\rho }_{c}^{t}}+\left(1-{\delta }_{c}^{t}\right).{QD}_{c}^{{\rho }_{c}^{t}}{)}^{\frac{1}{{\rho }_{c}^{t}}}$

• 17) $\frac{{QE}_{c}}{{QD}_{c}}=(\frac{{PE}_{c}}{{PD}_{c}}.\frac{1-{\delta }_{c}^{{\rho }_{c}^{t}}}{{\delta }_{c}^{t}}{)}^{\frac{1}{{\rho }^{t}-1}}$

• 18) ${QX}_{c}={QD}_{c}$

• 19) ${YF}_{hf}={shry}_{hf}.((1-{tf}_{f})\sum_{f}{WF}_{f}.{\overline{\mathrm{WFDIST}} }_{\mathrm{f a}}.{QF}_{fa}-{trr}_{f}.ER)$

• 20) ${YH}_{h}=\sum_{f}{YF}_{hf}+{{tri}_{h ,firm}+tr}_{h,gov}.CPI+{tr}_{h,ROW}.ER$

• 21) ${QH}_{ch}=\frac{{\beta }_{ch}.\left(1-{MPS}_{h}\right).\left(1-{ty}_{h}\right).\left(1-{sh}_{h}\right).{Y}_{h}}{{PQ}_{c}}$

• 22) $\mathrm{YG}=\sum_{h}{ty}_{h}.{Y}_{h}+\sum_{cm}{tq}_{c}.\left({PD}_{c}.{QD}_{c}+{PM}_{c}.{QM}_{c}\right)+\sum_{cm}{tm}_{c}.ER.{pwm}_{c}.{QM}_{c}+\sum_{ce}{te}_{c}.ER.{pwe}_{c}.{Qe}_{c}+{tr}_{gov,row}.er+{tr}_{gov,insd}$

• 23) $YENT=\sum_{f}{shry}_{ent,f}.\left(\sum_{f}{WF}_{f}.{WDIST}_{fa}.{QF}_{fa}+{trr}_{f}.ER\right)+\sum_{insd}{tr}_{ent,insd}+{tr}_{ent,row}.ER$

• 24) $HSAV=\sum_{h}{MPS}_{h}.\left(1-{ty}_{h}\right).\left(1-{sh}_{h}\right).{YH}_{h}$

• 25) $GSAV=YG-\sum_{c}{PQ}_{c}.{gles}_{c}.gdtot+\sum_{ins}{tr}_{ins,gov}$

• 26) $ENTSAV=YG-\sum_{c}{PQ}_{c}.entdtot+\sum_{ins}{tr}_{ins,ent}$

• 27) ${QFS}_{f}=\sum_{a}{QF}_{fa}$

• 28) ${\mathrm{QQ}}_{c}=\sum_{a}{QINT}_{ca}-\sum_{h}{qh}_{ch}+{PQ}_{c}.gles.GDTOT+{PQ}_{c}.{eles}_{c}.entdtot+qinv$

• 29) $\sum_{cm}{pwm}_{c}.{QM}_{c}+\sum_{f}{trf}_{f}+\sum_{ins}{tr}_{row,ins}+OCAP=\sum_{ce}{pwe}_{c}.{QE}_{c}+\sum_{f}{trr}_{f}+\sum_{ins}{tr}_{ins,row}+FSAV$

• 30) $\sum_{c}{QINV}_{c}.{PQ}_{c}+OCAP+WALRAS=\sum_{h}HSAV+GSAV+ENTSAV+FSAV.ER$

• 31) $\sum_{c}{PQ}_{c}.{cwts}_{c}=cpi$

• 32) $GDP=\sum_{a}{QA}_{a}.{PA}_{a}$