Owing to the fundamental importance of food to human welfare and of climate to crop and livestock production, agriculture has been a focus of research on the impacts of climate change and variability. This research has been largely concerned with implications for the supply and cost of food and for producer incomes. Societal interest in agriculture is, however, much broader than these issues. Agriculture is a source of several positive and negative environmental externalities. Several studies have been directed at the effects of climate change on the negative environmental externalities from agricultural production, including runoff, leaching, and erosion. These studies excel at modeling the biological and physical relationships and processes underlying runoff, leaching, and erosion. However, they do not consider economic responses by farmers to climate change. Instead, they implicitly assume that farmers will continue to produce the same crops and livestock on the same land using the same management practices and technologies. Changes in temperature, precipitation, and atmospheric carbon dioxide (CO2) levels that affect the profitability of agricultural enterprises could lead to changes in the amounts and locations of cropland and pasture land, the types of crops and livestock produced, and technologies and management practices for individual crops and livestock. These economic responses could give rise to "indirect" impacts of climate change on runoff, leaching, and erosion that could in principle augment, diminish, or even reverse the "direct" impacts assuming no economic responses on the part of producers. This paper analyzes the potential impacts of climate change on agriculture and water quality in the U.S. Chesapeake Bay Region for the year 2030, taking into account economic responses by farmers to climate change. A simulation model of corn production in twelve watersheds within the Chesapeake Bay Region with economic and watershed components is constructed that links climate to productivity, production decisions by corn farmers, and nonpoint nitrogen loadings delivered to the Chesapeake Bay. Corn is an important crop to study because of its importance to the region's agriculture and because it is a major source of nutrient pollution. The simulation results indicate that economic responses by farmers to climate change do matter, in the sense that they have major impacts on environmental externalities due to climate change. Assuming that farmers do not respond to changes in temperature, precipitation, and particularly atmospheric CO2 levels could lead to mistaken conclusions about the magnitudes and even the directions of environmental impacts. While our research is limited to water pollution from agriculture, this result has broader implications for research on the impacts of climate change on environmental quality: the indirect impacts of climate-economy interactions may well be of as much importance to the environmental impacts of climate change as direct climate-environment interactions. The flip side of this result is that the market impacts of climate change in these sectors (changes in output, prices, producer and consumer welfare) may provide a very limited picture of the overall consequences of climate-induced change in sectors with significant nonmarket impacts (e.g., agriculture, forests, energy).
