Modelling the economy-wide marginal impacts due to climate change in Australian agriculture

The decade from 2011 to 2020 started with the tail end of one of the wettest two year periods observed in eastern Australia and ended with recovery from the hottest and driest year ever recorded. An increasing prevalence of extremes is consistent with expectations concerning climate change. This study uses observed rainfall and temperature anomalies to infer farm productivity levels by region. Productivity shocks are run year-by-year in the multi-regional VU-TERM model. The three scenarios of the study include a decade reflecting 2011 to 2020 seasons, a "2030" scenario in which farm productivity falls by 10% relative to the first scenario in five of the 10 seasons and a "2050" scenario in which, in the corresponding years, farm productivity falls 20%. The welfare impact of the first scenario relative to a baseline without year-on-year seasonal variations is minus $35 billion in net present value terms. The welfare impact in the second scenario is minus $46 billion and minus $59 billion in the third scenario. Welfare losses are alleviated to a small extent by resource movements. In particular, in years in which drought induces collapses in productivity, livestock production switches from grazing to fodder inputs. The study assumes that Outback Queensland consists of rangeland production in which a switch to fodder is not feasible. The region's income losses in drought are worse than elsewhere. Lack of input flexibility contributes to the region's losses.