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Abstract

Adaptation costs and finance are topical issues in many developing countries. In this study, we apply a computable general equilibrium (CGE) model to examine the economy-wide and regional effects of planned adaptation aimed at maintaining the current level of agricultural productivity in the face of climate change in Ethiopia. We derived the direct costs for planned adaptation in agriculture with respect to three alternative scenarios of climate change-induced productivity shocks of −5%, −10%, and − 15% under three adaptation policy effectiveness scenarios. The results show that such adaptation may require incremental public budget equivalent to 25–100% of the current public expenditure for adaptation relevant measures in agriculture. This will increase urban households’ welfare by 1% to 5% due to the incremental demand for skilled labor types. It will however reduce the government saving by 33% to 173%, and pull factors of production from the private sector which eventually decreases manufacturing output (by 2% to 10%), other private services (by 3% to 13%) and GDP of urbanized regions (by 0.2% to 3%). Such trade-offs may strain the current macroeconomic endeavors of the country, e.g. the aim to reduce fiscal deficits and the effort to foster structural transformation driven by public investment. Policies that promote urban and commercial agriculture may help to reduce the country’s reliance on rain-fed smallholder agriculture (and hence the need for planned adaptation) while fostering structural transformation.