MANAGING ENVIRONMENTAL RISK IN PRESENCE OF CLIMATE CHANGE: EVIDENCE FROM ETHIOPIA

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 (i) past adaptation to climate change adaptation reduces current downside risk exposure, and so the risk of crop failure; (ii) climate change adaptation would have been more beneficial to the non-adapters if they adapted, in terms of reduction in downside risk exposure; and (iii) climate change adaptation is a successful risk management strategy that makes the adapters’ more resilient to climatic conditions.