Climate change has been heralded as presenting Swedish agriculture with opportunities, particularly: a longer growing season, new crops and higher yields. However, the risks associated with crop production will increase if the weather (e.g., daily rainfall and temperatures) becomes more variable, because it would bring about, e.g., more frequent dry or wet conditions, as well as more frequent or more intense extreme weather events. Thus while the Swedish climate is expected to become better on average for agriculture, greater weather (and price) variation increases risks. Conserving biodiversity (natural capital) and associated ecosystem services can provide farmers with insurance against future risks.

The overriding aim of this research is to evaluate the implications of climate scenarios that explicitly consider weather variability, for the optimal management of natural capital. This will be done using multiple methods: a) estimating statistical crop production functions that include weather variables and indicators of natural capital; b) developing climate scenarios including weather variability; c) Optimizing natural capital using dynamic programming; and d) Evaluating the insurance value, implicitly associated with the conservation of natural capital, using real-option pricing techniques.

The project is in collaboration with researchers from Centre for Environmental and Climate Research (CEC). It is financed by BECC and coordinated by Mark Brady, with expected completion in 2021.