The economy-wide impacts of climate change and adaptation pathways in Rwanda

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1. www.akademiya2063.org The economy-wide impacts of climate change and adaptation pathways in Rwanda Henry Okodua Department of Economics Covenant University, Nigeria henry.okodua@covenantuniversity.edu.ng okodua@gmail.com Victoria Sedegan Department of Capacity and Deployment AKADEMIYA2063 gtadesse@akademiya2063.org Comprehensive Africa Climate Change Initiative (CACCI) Project knowledge Seminar , Kigali, Rwanda Wednesday March 27, 2024
2. www.akademiya2063.org Introduction • Rwanda’s distinctive geographical landscape - hilly topography could be a source of increased vulnerability to climate change in the country. • The World Bank in its 2021 Climate Risk Country Profile for Rwanda noted that small plot cultivation occur on hills or mountain areas • Increased runoff and landslides have been experienced, increasing the vulnerability of the agricultural sector to climate change impacts. • The agricultural sector has strong linkages to the rest of the Rwandan economy and major shocks to the sector could easily be transmitted to the rest of the economy. • Agricultural sector provides the main impact pathway of the climate crisis in Rwanda and we can track this impact from agriculture to the rest of the economy. • An evidence-based study of economy-wide nature is considered necessary to track these inter-sectoral linkages.
3. www.akademiya2063.org National Policy Response to Climate Change • Rwanda has a robust national policy response agenda to climate change. • Country has submitted its Updated Nationally-Determined Contribution (NDC) to the UNFCCC in 2020 • Commitments are also guided by Rwanda’s Green Growth and Climate Resilience Strategy (2011) (GGCRS), and • National Strategy for Transformation (NST 1) (2017–2024). • However, Rwanda's diverse ecosystems are still particularly highly vulnerable to extreme climate events .
4. www.akademiya2063.org Some Key Questions • In quantitative terms, how damaging is climate change to the Rwandan economy in general and the agricultural sector in particular? • How aggressive should the country be in the implementation of its adaptation measures to combat climate change? • Which household groups in the country are the most vulnerable to climate shocks and therefore deserving of highest priority in the implementation of key adaptation interventions? • What are the investment requirements to compensate for the economic damage that is attributable to climate change in Rwanda?
5. www.akademiya2063.org Methodological Approach • The study utilizes relevant economic simulation models to address the stated research questions. • The ex-ante analysis of climate change and adaptation strategies is carried out using a combination of the static computable general equilibrium (CGE) model and the positive mathematical programming (PMP) model. • These economic simulation models interact to capture issues related to growth, employment, and income generation, household income distribution and household consumption expenditure. • The models are applied to the Rwandan economy using the most recent and relevant macro and micro databases.
6. www.akademiya2063.org Methodological Approach/…2 • A stepwise implementation of the methodology is followed. • First, the simulation scenarios are built through an exhaustive review of existing literature to collect evidence on the impact of climate change and adaptation options on agricultural productivity. • This consists in conducting an extensive review of evidence on the impact of climate change on the agricultural sector in Rwanda, and East Africa, and Africa. • Second, an economic accounts for agriculture (EAA) for Rwanda is created for use in the PMP model. • The PMP itself is useful in calibrating models of agricultural production and resource use using nonlinear yield or cost functions.
7. www.akademiya2063.org Methodological Approach/…3 • The resulting nonlinear models is relied on to simulate variations in agricultural land use and land productivity results for Rwanda. • Third, evidence on the land use and land productivity effects of climate shocks from the PMP simulation exercises are fit into the static CGE model. • This helps to assess economic growth, employment, income changes by type of production factors and category of household, household consumption expenditure, etc. • A similar approach is repeated to assess the impact of the country’s adaptation measures in mitigating the adverse effects of climate change shocks on agricultural yields in the country.
8. www.akademiya2063.org Major Assumptions of the CGE model • This standard CGE model is adapted to the climate change issue by adopting a long-term closure rule to consider more accurately the time dimension. • Hence, labor, agricultural land, and other capital are fully mobile between economic activities, which represents a long-term situation where the economy has time to adjust. • Current public expenditure and fiscal balance are fixed relative to GDP. • The volume of investment is also kept fixed relative to GDP through household savings. • Thus, the model is investment-driven in the sense that total investment determined total saving, i.e. the sum of private, government, and foreign savings.
9. www.akademiya2063.org Data Sources for the CGE model • The primary source of data used for this CGE model is the 2021 SAM for Rwanda. • The 2021 SAM for Rwanda has • 41 industries (including 17 agricultural activities) • 41 commodidities • 5 productions factors (including agricultural land) • 3 categories of labor, and • 10 representative groups of households. • Thurlow (2021) provides more detailed information on the 2021 SAM for Rwanda.
10. www.akademiya2063.org Modeling the Macro-Economic Impact of Climate Change • In implementing the macro-model, we adopt a stochastic approach to a static CGE model • Many studies use a deterministic approach to assess the effects of climate change on agriculture. • However, deterministic shocks ignore the uncertainty associated with climate change and its implications on yield as established in the extant literature • The key intuition behind the use of a stochastic approach to CGE modeling is that it considers the uncertainties in the evolution of the climate and its effects on agricultural yields. • The climate change shock is translated into variation in the productivity of agricultural activities and, consequently, is propagated in the economy through the upstream and downstream linkages of the agricultural sector with the rest of the economy.
11. www.akademiya2063.org Simulation Scenarios • Baseline scenario • Climate change scenario • Climate change and adaptation strategy scenario Key Effects Examined • Effects on the agricultural sector • Effects on non-agricultural sectors • Effects on the macro-economy Ø GDP Ø Government Income Ø Employment and factor rewards Ø Household Income and Consumption • Contribution of climate change adaptation strategies
12. Effects on Agricultural Sector Table 1: Changes in agricultural value-added in Nigeria Business-as-Usual Climate change Mean SD Mean SD Agriculture 4.83 0.46 -7.17 0.21 Maize 4.5 0.18 -11.68 0.04 Rice -1.53 0.35 4.76 0.26 Other cereals 1.71 0.85 -27.79 0.25 Pulses 1.69 0.11 -2.32 0.04 Oilseeds -2.37 0.2 3.78 0.09 Roots 18.23 0.71 -15 0.21 Vegetables 3.87 0.15 -22.34 0.12 Fruits and nuts 5.48 0.27 0.88 0.15 Coffee, tea, and cocoa 10.08 1.24 -15.31 0.7 Other crops 6.6 0.53 13.35 0.19 • Some of the agricultural crops that will be most severely affected in terms of decline in value-added due to climate change shocks will include: • Maize, • Other cereals, • Vegetables, • Coffee, tea, and cocoa, etc.
13. Effects on the non-agricultural sector • The most negatively affected sectors by climate change shocks when compared to the BAU scenario include: • Public administration, • Construction, • Health and Social Work, etc. • Sectors with minimum or no linkage to the agriculture sector are positively impacted -4.43 -4.03 -3.85 -3.33 -2.65 -2.60 -2.46 -2.37 -2.11 -2.04 -1.88 -1.86 -1.81 -1.31 -0.94 -0.91 -0.84 -0.82 -0.67 -0.43 -0.26 -0.16 0.05 2.88 3.94 4.42 -5.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00 5.00 Public administration Construction Health and social work Education Other services Accommodation and food services Business services Services Sector Processed foods Wholesale and retail trade Metals and metal products Electricity, gas and steam Finance and insurance Beverage and tobacco Water supply and sewage Industry Sector Wood and paper products Non-metal minerals Transportation and storage Textiles, clothing and footwear Real estate activities Machinery, equipment and vehicles Information and communication Chemicals and petroleum Other manufacturing Mining Variation (Percentage points) Sector Figure 1: Climate Change Impacts on Non-Agriculture Sectors
14. Effects on the macro-economy • The simulation results indicate decreased performance in key macroeconomic indicators under the CC scenario when compared to the reference scenario. • GDP will decrease by 4.58 percentage points • Value-added in the economy, employment, government income, household income, and household consumption will all record decreased performances. • In all, household income is least affected with a decrease of 1.77 percentage points under the CC scenario when compared to the reference scenario. • This result suggests that in terms of income generation, households in Rwanda are much more resilient in coping with climate shocks than other economic agents in the country. -4.58 -4.55 -3.72 -3.62 -1.77 -3.67 -5.00 -4.50 -4.00 -3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 GDP VAD EMP GVT INC HH INC HH CON Variation (Percentage points) Macroeconomic Indicator Figure 2: Macroeconomic Impact of Climate Change in Rwanda
15. Effects on the macro-economy Sector contribution to GDP decline, under CC scenario • Change in GDP Growth: -4.58 percent (under climate change scenario when compared to the reference scenario) • The shrinking agricultural sector is primarily responsible for the GDP decline with a contribution of 69.8% • The services sector also exhibits a considerable contribution to GDP decline under the climate change scenario (25.2%) to the GDP decline • The contribution of the industry sector to GDP decline is the least at 5.0%. Agriculture, 69.8% Industry, 5.0% GDP 4.58% Services, 25.2% Figure 3: Sector contribution to GDP decline, under CC scenario Agriculture Industry Services
16. Effects on the macro-economy Changes in employment volume by category in Rwanda, CC compared to BAU scenarios • Climate change shocks on agricultural yields would hit medium-skilled and high-skilled laborers most severely than low-skilled laborers in terms of changes in employment numbers • The model results indicate equal magnitude of medium-skilled and high-skilled employment loss of up to 3.8% due to climate change shocks. • Low-skilled employment loss will be 3.3%. -3.3 -3.8 -3.8 Low skilled labor Medium skilled labor High skilled labor Variation (percentage points) Labour Type Figure 3: Climate Change Impact on Employment
17. Effects on the macro-economy • Share of Employment Earnings by Labor Category and Economic Sector in Rwanda • In the long-run, 38% of all earnings of low- skilled workers will be accounted for by the agriculture sector • The services sector will account for 35% of earnings by the same category of labor. • The industry sector will be responsible for only 27% of earnings of low-skilled workers. • Interestingly, 80% of all earnings of high- skilled workers will be accounted for by the services sector in the long run. 38 27 35 49 26 25 7 13 80 0 20 40 60 80 100 120 140 160 Agriculture Industry Services Figure 5: Share of Employment Earnings by Labor Category and Economic Sector in Rwanda Low skilled labor Medium skilled labor High skilled labor
18. Effects on the macro-economy Changes in Real income of Household categories in Rwanda, CC against BAU Scenarios • Real income of the highest quintile in rural and urban households in Rwanda will decrease by 1.4% and 1.5% respectively due to climate change shocks • Real income of the lowest quintile in rural and urban households in Rwanda will decrease by 2.9% and 2.8% respectively due to climate change shocks • Average real income loss due to climate change will be more severe for rural households (2.0 %) as against 1.6 % for urban households under the climate change scenario when compared to the reference scenario. • Expectedly, the severity of household income loss is highest among the lowest household quintile in both urban and rural areas . • Overall, the decrease in real household income for the entire country will be 1.8%. -1.8 -2.0 -1.6 -2.9 -2.8 -2.5 -2.5 -2.3 -2.4 -2.0 -2.0 -1.4 -1.5 All Rural Urban Quintile1(Rural) Quintile1(Urban) Quintile2(Rural) Quintile2(Urban) Quintile3(Rural) Quintile3(Urban) Quintile4(Rural) Quintile4(Urban) Quintile5(Rural) Quintile5(Urban) VARIATION (PERCENTAGE POINTS QUINTILES Figure 6: Climate Change Impact on Household Income
19. Effects on the macro-economy Changes in Real consumption expenditure by Household quintiles in Rwanda, CC against BAU Scenarios • Real consumption expenditure of the highest household income quintile in rural and urban areas in Rwanda will decrease by 2.5% and 1.7% respectively due to climate change shocks • Real consumption expenditure of the lowest quintile in rural and urban households in Rwanda will decrease by 7.7% and 5.9% respectively due to climate change shocks • Average decline in real consumption expenditure by households will be more severe for rural households (5.2%) as against 1.9% for urban households under the climate change scenario when compared to the reference scenario. • Overall, the decrease in real consumption expenditure by households in the entire country will be 3.7%. -3.7 -5.2 -1.9 -7.7 -5.9 -7.4 -5.4 -6.7 -3.7 -5.3 -2.8 -2.5 -1.7 All Rural Urban Quintile1(Rural) Quintile1(Urban) Quintile2(Rural) Quintile2(Urban) Quintile3(Rural) Quintile3(Urban) Quintile4(Rural) Quintile4(Urban) Quintile5(Rural) Quintile5(Urban) VARIATION (PERCENTAGE POINTS QUINTILES Figure 7: Climate Change Impact on Household Consumption Expenditure
20. www.akademiya2063.org The contribution of climate change adaptation strategies • Four adaptation options are tested. These are: • (i) Soil and water conservation (reduced tillage, terracing, ridging, bunds, and mulching), • (ii) Use of improved varieties, • (iii) Irrigation, and • (iv) Use of organic and inorganic fertilizers. • Empirical evidence on the impacts of these adaptation strategies on crop yields has been obtained from existing research results (peer- reviewed), and is presented next
21. www.akademiya2063.org The contribution of climate change adaptation strategies/…2 • Adaptation Scenarios - Soil and water conservation [Crops 8-46%, Maize 14-50%] o Reduced tillage increases crop yield between 8% for Cote d’Ivoire (World Bank, 2019). o Terracing, ridging, and bunds increase crop yield between 44% for Cote d’Ivoire (World Bank, 2019). o Mulching increases crop yield between 46% for Cote d’Ivoire (World Bank, 2019). o Soil and water conservation increases maize yield between 14 and 50% in Africa (Lebel et al., 2015).
22. www.akademiya2063.org The contribution of climate change adaptation strategies/…3 • Adaptation Scenarios • Improved Varieties [Crops 10-53%, Maize 20-62.3%] • Crop yield increase by at least 25% in Sub-Saharan Africa (Waha et al., 2013). • The average yield gain over local varieties from adopting improved bean varieties is 53% in Rwanda (CGIAR, 2014) • Cote d'Ivoire, Improved crop varieties use increase crop yield by 36% (World Bank, 2019) • Increase of maize yield between 20% and 50% in Western Africa (CGIAR, 2010). • Cameroon (Maize from 32.1% to 62.3%; Sorghum by 38.3% to 155.7% in 2020 and by 5.7% to 79.9% in the 2080; Bambara groundnut (11% to 100%) (Tingem, M., & Rivington, M., 2008) • The estimated yield difference between local and improved varieties was only 10-30% (CIAT, 2008)
23. www.akademiya2063.org The contribution of climate change adaptation strategies/…4 • Adaptation Scenarios • Irrigation [agriculture 10 - 57%, rice 23%] • Increasing agricultural production by 38 percent for sub-Saharan Africa (Mabhaudhi, 2018). • Crops yields increase by 31-77% in Rwanda (IGC, 2018) • Irrigation has the potential to boost agricultural productivity by ~50% (Shukri, 2013)
24. www.akademiya2063.org The contribution of climate change adaptation strategies/…5 • Adaptation Scenarios • Organic and Inorganic Fertilizer [crops 20-53%] • Correct fertilizer usage is expected to increase yields of a coffee farmer by approximately 20% in Rwanda (USAID, 2012) • Cote d'Ivoire, Inorganic fertilizer use increase crop yield by 68% (World Bank, 2019). • Cote d'Ivoire, Organic fertilizer use increase crop yield by 53% (World Bank, 2019). • Cote d'Ivoire, green manure use increase crop yield by 42% (World Bank, 2019).
25. www.akademiya2063.org The contribution of climate change adaptation strategies/…5 • Simulation Results • The climate adaptation simulation scenarios provide some insights into the investment requirements that will compensate for the economic damage attributable to climate change shocks impacts on crops yield in Rwanda. • The simulation results in Figure 8 show the additional share of cultivated area that Rwanda must invest in under each climate adaptation strategy in order to reverse the economic (GDP) loss caused by the climate change shock on crops yield in the country.
26. Contribution of climate change adaptation strategies • Additional cultivated area to cover under various adaptation options (%) • In order to recover the GDP loss that is due to climate change shocks, investment in: • Soil and water conservation (reduced tillage, terracing, ridging, bunds, and mulching) in Rwanda must cover additional 24% of total crop area • Improved crop varieties must cover additional 20% of total crop area to be cultivated • Irrigation to cover additional 19% of the total crop cultivation area of the country will be helpful. • Finally, the application of organic and inorganic fertilizer to cover additional 20% of Rwanda’s total crop area will also help. 24 20 19 20 0 5 10 15 20 25 30 Soil and Water Conservation Improved Varieties Irrigation Organic and Inorganic Fertilizer Figure 8: Additional cultivated area to cover under various adaptation options (%)
27. www.akademiya2063.org Summary and Conclusion • Using economic simulation models, the study shows that climate change shocks potentially have adverse consequential effects on Rwanda’s economic growth, given the extensive reliance of the economy on climate sensitive sectors such as agriculture. • Efforts to sustain desirable economic growth trajectory in Rwanda will require building resilience to climate shocks. • Although Rwanda has put in place a robust national climate change response strategy to effectively address the climate issue, the simulation results still indicate that climate shocks will continue have a damaging effect on agricultural productivity and the economy in general, unless effective adaptation measures are put in place to stem the undesirable tide.
28. www.akademiya2063.org Summary and Conclusion/…2 • Based on the analysis carried out in this study, the assessment of the economic impact of climate change has shown the urgency of implementing adaptation strategies. • If the country continues on the path of business-as-usual without embracing significant climate adaptation measures, climate change will continue to reduce Rwanda’s overall economic performance. • Based on the findings of the study, the following recommendations are considered imperative: • Scale-up of best practices related to the institutionalization of climate change actions and fund mobilization efforts.
29. www.akademiya2063.org Summary and Conclusion/…3 • Mainstreaming adaptation practices in the agricultural sector will require improved prediction capabilities and a better knowledge of climate suitability for crops. • The predictions will help to determine – with a certain level of certainty – how the climate will change in the short-term and plan for cropping activities. • The crop climate suitability will, based on the predictions mentioned above, indicate suitable places to grow specific crops based on climate.
30. www.akademiya2063.org Summary and Conclusion/…4 • Both inputs would help in adapting to a changing climate rather than relying only on traditional knowledge of the crop calendar. • Finally, the study advocates for the promotion of climate smart practices such as soil and water conservation practices, and • Promote the use of irrigations and improved agricultural technologies to protect the productivity decline of the agricultural sector and hence shield the economy from climate induced crises.
31. Thank You