Abstract

This study presents an application of the Ricardian approach to explore the impact of climate change on farmland values in Nepal. The Ricardian approach is estimated using a panel fixed effects model, and the outcome is compared against two separate models that account for spatial correlation: a spatial autoregressive (SAR) model; and a spatial error model (SEM). The findings suggest that Nepalese farmlands are sensitive to climate change, and this result was consistent in both the non-spatial and the spatial frameworks. The inclusion of the spatial effects, however, revealed the presence of positive spatial autocorrelation and produced conservative estimates of climate change impacts. The net effect of annual increases in average temperature was negative; while the net effect of higher annual average precipitation was a positive outcome on farmland values. In particular, we found that the marginal effect of every degree increase in average annual temperature was Rs.180 /hectare ($1.80) reduction in farmland values. Likewise, for rainfall, it was found that 1 mm increase in average annual rainfall would positively affect farmland value by Rs.225/hectare ($2.25). Finally, the study findings suggested that extreme weather events could also impact the agricultural productivity and the farmland values in Nepal.

Key words: Climate change, ricardian approach, spatial panel data analysis, Nepalese agriculture, environmental valuation.