Improving the way land use change is handled in economic models

Abstract

Sound economic modelling of land use in global economic models is critical for evaluating agricultural, biofuel, and climate policies. Current approaches do not preserve physical land area, do not account for the fact that land is of different qualities, or do not explicitly include the cost of converting land from one use to another. This study proposes a land use modelling framework building on the additive form of the constant elasticity of transformation (ACET) approach. We demonstrated that the framework could (1) directly provide traceable physical land use results, (2) flexibly handle land productivity differences based on biophysical information, (3) explicitly introduce land conversion cost, and (4) provide welfare decomposition in light of land heterogeneity and conversion cost. An experiment of mandating a 10 percent increase in grain consumption in the US food sector showed that ignoring land heterogeneity and conversion cost would underestimate the welfare loss by 28 percent.