Environmental Efficiency and Regulations, and Productivity Growth in the Face of Climate Change: An Analysis of U.S. Agriculture

Environmental Efficiency and Regulations, and Productivity Growth in the Face of Climate Change: An Analysis of U.S. Agriculture Eric Njuki, Ph.D. University of Connecticut, 2013 Abstract The objectives of this dissertation are threefold: 1) To measure the environmental efficiency of Northeast U.S. dairy farms in the presence of undesirable outputs; 2) To evaluate the economic costs of environmental regulations and abatement activities on dairy farms using county level data for the major dairy producing areas in the U.S.; and 3) To analyze total factor productivity (TFP) in U.S. agriculture in the face of climate change by utilizing a TFP index that satisfies key properties. The first essay builds upon recent developments in productivity analysis where the productive unit generates both desirable and undesirable outputs. Using a Northeast U.S. dairy dataset, this study makes two novel contributions to the literature. First, it uses EPA (2009) methodologies to construct a comprehensive index of emissions that incorporates three major sources of pollution that originate from dairy farms: fuel, fertilizer, and livestock. This contrasts with previous studies that rely on partial measures based only on surplus nitrogen stemming from the over-application of fertilizer. Second, using a directional output distance function (DODF) on a Bayesian framework, we establish the shadow value of emissions. Key results indicate that smaller dairy farms face higher shadow values than larger operations. Consequently, the smaller units would face higher costs than their larger counterparts when reducing pollution. These results are crucial from a public policy perspective because they will assist in crafting an appropriate response to the challenge of pollution reduction while considering the potential impact on smaller operations. The second essay examines the potential impact of regulatory intervention on dairy farming in the U.S. The pollution index and the econometric methods are the same as in the previous essay. Results indicate that on average, values of foregone output following regulatory intervention vary widely across different regions. Revenue losses range from 1.8% to 13.1% of total revenue across the U.S. between 1978 and 2007. Climatic factors play an important role in agricultural output but this issue has not been addressed explicitly in the econometric analysis of total factor productivity growth (TFP). The third essay addresses this gap in the literature and makes two important contributions: 1) It utilizes a TFP index, the Färe-Primont-O’Donnell (FPO) index, that satisfies key axiomatic and economic-theoretic approaches; and 2) It uses this index to evaluate TFP change in U.S. agriculture in the face of climatic variability. The TFP index is multiplicatively complete and is decomposed into climatic effect, technological progress, technical efficiency and scale efficiency changes. The climatic effect component, which combines temperature and precipitation, contributed positively to TFP growth in eight southern states, and negatively in the rest of the contiguous states