Downscaled climate change projections for California, when translated into changes in irrigation water delivery and then into profit from agriculture in the Central Valley, show an increase in conventional measures of variability such as the variance. However, these increases are modest and mask a more pronounced increase in downside risk, defined as the probability of unfavorable outcomes of water supply or profit. This paper describes the concept of downside risk and measures it as it applies to outcomes for Central Valley agriculture projected under four climate change scenarios. We compare the effect of downside risk aversion versus conventional risk aversion or risk neutrality when assessing the impact of climate change on the profitability of Central Valley agriculture. We find that, when downside risk is considered, the assessment of losses due to climate change increases substantially.
downside risk, climate change, variability, agriculture, outcome distribution, water resources
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Hanemann, Michael; Sayre, Susan Stratton; and Dale, Larry, "The Downside Risk of Climate Change in California’s Central Valley Agricultural Sector" (2016). Economics: Faculty Publications, Smith College, Northampton, MA.