A productivity indicator for adaptation to climate change

Abstract

This study draws on economic index theory to construct a new indicator for adaptation to changing environmental conditions, most notably climate change, which may shift the production technology over time. Such environmental shifts are largely exogenous to firm decision making, for instance investments in research and development, which may also lead to technology change. Few existing measures of total factor productivity (TFP) make this distinction, between exogenous environmental shifts and shifts due to firm decision making or innovation. We introduce a nonparametric Luenberger productivity indicator for adaptation, which allows for decomposition of standard technology and efficiency change measures into both environmental and production components. We apply this framework to agricultural production in the US Mississippi River Basin for recent decades, working with USDA Census of Agriculture data at the county level and key climate conditions. We also match the production and climate data to estimates of Nitrogen loading over time, to incorporate water quality into the adaptation indicator. Our results indicate sustained overall productivity growth, for both agricultural production and nitrogen loading reductions, driven by technology gains outweighing efficiency losses. Decomposing further to the adaptation component, our results indicate modest overall adaptation gains, driven by both adaptation efficiency and technology gains.