A new paper from Motu Research (by Farnaz Pourzand, Kendon Bell) examines how differences in climate across space influence the value of New Zealand agricultural land.

The authors use the Ricardian approach to price the climate, using property valuation data from 1993 to 2018.

They apply the ‘spatial first differences’ method, which compares differences in climate between neighbours with differences in land values between neighbours.

They say this method allowed them to estimate the impact of long-term climate conditions on farmland values across different land-uses, while controlling for sources of bias associated with unobserved heterogeneity.

The paper says:

“We find that a warmer or drier climate is associated with higher farmland values in New Zealand.

“As the spatial first differences method accounts for unobserved heterogeneity associated with variables not related to climate, these associations likely represent causal effects on land values of variables tied to climate.

“While agricultural productivity is one pathway by which climate affects land values, our results may also be due to variation in the value of land improvements tied to climate or amenity values associated with the option value to convert to a residential use”

 The paper notes that New Zealand’s annual temperature in the sample period was between 4°C and 16°C,

“… so using these results to extrapolate outside this range should be done with caution.”

The authors raise a good question about their work:  if they aren’t able to distinguish the climate amenity effect from the productivity effect in their results, why is this result useful at all?

They answer:

“We still believe our result is useful in that it highlights an empirical puzzle for future research to resolve, which is to what extent can the climate–land-value relationship be explained by agricultural productivity versus climate amenities associated with residential use. Future research could also pursue general methods that distinguish the effect of improvements from the pure productivity effect.”

Source:  Motu Economic and Public Policy Research Trust