Conference Agenda

One of the many effects of Climate Change is increased drought making water availability scarcer in more regions of the world, and primarily affecting the agricultural sector. In this context, we examine the effects of farmers' investments in adaptive measures as a response to climate change on the sustainability and profitability of the resource. To this goal, we develop a two-period model, where the impact of climate change impacts the availability of the groundwater resource in the second period and farmers respond to it by investing in solutions that reduce their marginal extraction costs. Theoretical results show that adaptive investments have different implications depending on the perspective considered. From a strict environmental standpoint, they are detrimental, as they lead to a lower final stock of the natural resource. From the farmers' perspective, adaptive investments are beneficial, as they allow for higher profits. Finally, from the regulator's standpoint, the impact depends on the weight given to sustainability concerns on the welfare function. Furthermore, in cases where adaptation negatively impacts the overall welfare and therefore policy intervention is justified, we assume that the regulator responds by imposing a tax on second-period extraction rates, thereby reducing the effectiveness of adaptive investments. After determining the optimal tax rate, we evaluate its impact by comparing the outcomes of the model with adaptation to those of the model with both adaptation and taxation. The results indicate that, from an environmental perspective, the tax is beneficial as it helps preserve a larger final resource stock. From the farmers' viewpoint, taxation is always detrimental. Finally, from the regulator's perspective, the impact is always positive given the sustainability concerns.