Managing Environmental Risk in Presence of Climate Change: The Role of Adaptation in the Nile Basin of Ethiopia

Abstract

This study investigates the impact of climate change adaptation on farm households’ downside risk exposure in the Nile Basin of Ethiopia. The analysis relies on a moment based specification of the stochastic production function. We use an empirical strategy that accounts for the heterogeneity in the decision on whether to adapt or not, and for unobservable characteristics of farmers and their farm. We find that past adaptation to climate change (i) reduces current downside risk exposure, and so the risk of crop failure; (ii) would have been more beneficial to the non-adapters if they adapted, in terms of reduction in downside risk exposure; and (iii) is a successful risk management strategy that makes the adapters more resilient to climatic conditions.

Keywords: Adaptation, Climate change, Downside risk exposure, Environmental risk

JEL Classification: D80, Q18, Q54