This working paper by World Bank analyzes how changes in the prices of land, labor, and food induced by modest temperature increases over the next three decades will affect household-level welfare in India. Using a simple comparative statics framework, the paper studies the distributional implications of climate change at the sub-national level.
The authors predict a substantial fall in agricultural productivity, even allowing for farmer adaptation. Yet, this decline will not translate into a sharp drop in consumption for the majority of rural households, who derive their income largely from wage employment. Overall, the welfare costs of climate change fall disproportionately on the poor. This is true in urban as well as in rural areas, but, in the latter sector only after accounting for the effects of rising world cereal prices.
Adaptation appears to primarily benefit the non-poor, since they own the lion’s share of agricultural land. The results suggest that poverty in India will be roughly 3–4 percentage points higher after thirty years of rising temperatures than it would have been had this warming not occurred.
The paper estimates the welfare costs to Indian households of what might be considered moderate warming over the next three decades, and investigates the likely distribution of these costs in the population. Its main conclusions are as follows:
- The substantial fall in agricultural productivity (17 per cent overall) that is predicted as a result of warming will translate into a much more modest consumption decline for the majority of households. This is because these households derive the bulk of their income from wage employment and (rural) wages are estimated to fall by only a third as much as agricultural productivity.
- Climate change will have heterogeneous geographical impacts. Most strikingly, districts in the northwest of India, a region which is now comparatively well off will suffer some of the largest percentage declines in consumption, whereas parts of eastern India, such as the very poor state of Orissa, will not fare too badly in relative terms.
- Once the welfare effects of rising cereal prices are accounted for, climate change impacts are regressive, falling more heavily on the poor than the rich. This is true in urban areas, where it is assumed that cereal price effects are the only welfare consequence of climate change, as well as in rural areas, where the beneficial impact of higher prices to agricultural producers offsets the decline in land productivity.
- Combining rural and urban areas to consider a population of nearly 1 billion, we find that climate change is even more strongly regressive than it is in each of these sectors taken in isolation. This is simply due to the fact that the biggest losers reside in rural areas and the fraction of rural residents declines as one moves along the income distribution.
- The benefits of adaptation will accrue disproportionately to the rich insofar as they would experience bigger consumption losses than the poor if adaptation opportunities were foreclosed i.e., if farmers had to respond to the permanent shock as though it were a temporary one. This, again, is a consequence of the rich owning the lion's share of agricultural land.
This last finding has an important policy implication. If the objective is protecting the poor from climate change, a focus on helping farmers adapt may be misplaced, although it cannot be said for certain until the cost of adaptation is known. Nevertheless, a better policy in this respect might be to reduce the share of rural income derived from climate sensitive employment, which is to say, to increase the share of income derived from non-agricultural activities. Promoting the non-farm sector, or at least removing obstacles to its development, would be one step in this direction.