American Association of Wine Economists Archives - An Economic View of the Environment

The Dean of Wine Economists Talks About the Impacts of Climate Change

The most climate sensitive sector of virtually any economy is agriculture, and of the many agricultural crops, surely one of the most sensitive to the climate is grape production for premium wines. The impacts will be different for different wine-producing regions, ranging from Bordeaux to the Napa Valley, and it will be good news for some regions, such as the United Kingdom, with its burgeoning production of excellent sparkling wines.

There is simply no one better in the world to talk about these impacts and what they mean for the wine industry than Orley Ashenfelter, the Joseph Douglas Green 1895 Professor of Economics at Princeton University, who virtually launched rigorous economic analysis of wine production and consumption. You can listen to our conversation in the latest episode of my podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Our full conversation is here.

In these podcasts, I converse with leading experts from academia, government, industry, and NGOs. Orley Ashenfelter fits perfectly in this group. Beyond his Princeton professorship, he has served as president of the American Economic Association, the American Law and Economics Association, and the Society of Labor Economics, and was the long-time Editor of the American Economic Review (for 16 years!). He is a Member of the National Academy of Sciences, and a Distinguished Fellow of the American Economic Association, the American Academy of Arts and Sciences, and the Econometric Society.

Although he is very well known for his extensive research and writing in labor economics, econometrics, and law and economics, for those of us who are wine aficionados, he is celebrated for his pioneering work on the economics of wine. So, in addition to all of the positions I mentioned above, for purposes of this blog essay, it may be more important to note that he is the current president of the American Association of Wine Economists and my fellow Co-Editor of the Journal of Wine Economics.

When we discuss the relationship between global climate change, grape growing, and wine production, Ashenfelter remarks that there are already some “quite remarkable things happening,” because some grapes are adaptable to extreme weather. For example, he cites the Marquette and Frontenac grapes which have been hybridized to withstand the cold winters of Minnesota!

Ashenfelter also references his research on French grapes, some of which have actually benefitted from global warming.

“After 1980, there’s literally not a year in which temperatures dropped back into the levels they were in the summers of the 1960s and 70s,” he says. “The primary effect in Bordeaux has been much warmer summers, and the primary effect of that has been much better wines.”

Ashenfelter also notes that some of the grapes grown in northern Italy, which are sensitive to cooler summers, are performing better in recent years.

“You can see the prosperity [in that region]. They’re getting more wine at high quality,” he says. “Now the problem of course is that some places are already too hot, and you can see the adaptation going on … in Greece, where what people are trying to do is to grow grapes at higher elevations. Higher elevations get you a little cooler.”

“In Spain, there’s deep concern about it,” he continues. “The Torres family has bought a lot of property in the mountains of Catalonia, preparing for the possibility that they may have to grow grapes at much higher elevations if they want to keep growing the same grapes they have grown. What you do see is a little incursion of some of these hybridized grapes.”

Adaptation also brings its challenges, Ashenfelter emphasizes, particularly for European winemakers.

“The ability to be able to adapt is in some places going to be restricted by government regulations, and it may just be that over time, there’ll have to be some relaxation of those regulations as there has been for example, in Italy. It may just be necessary. The Americans are … more loose about this. We use place names, but we don’t have any requirement that a certain grape be grown in a certain place.”

Temporary heat spikes or extreme cold snaps also pose a threat to grape growers, because they are highly unpredictable, and their effects can be severe.

“Grapes do not do well above 95 degrees, and they don’t do well below 55 degrees. These 105-degree heat spikes, unless you just throw water at the plant, the plant will actually suck the juice right out of the grapes and leave you with nothing,” Ashenfelter explains.

“A vine takes five years to mature,” he continues. “It’s extremely costly when you get these giant, super cold spells. And we’ve seen them happen in places where no one really would’ve expected them in the past. I don’t know how much that is climate change or how much it is something else.”

For this and much more, I hope you will listen to my compete conversation with Orley Ashenfelter, the 34^th episode in the Environmental Insights series, with future episodes scheduled to drop each month. You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program. Previous episodes have featured conversations with:

Gina McCarthy, former Administrator of the U.S. Environmental Protection Agency
Nick Stern of the London School of Economics discussing his career, British politics, and efforts to combat climate change
Andrei Marcu, founder and executive director of the European Roundtable on Climate Change and Sustainable Transition
Paul Watkinson, Chair of the Subsidiary Body for Scientific and Technological Advice (SBSTA) within the United Nations Framework Convention on Climate Change
Jos Delbeke, professor at the European University Institute in Florence and at the KU Leuven in Belgium, and formerly Director-General of the European Commission’s DG Climate Action
David Keith, professor at Harvard and a leading authority on geoengineering
Joe Aldy, professor of the practice of public policy at Harvard Kennedy School, with considerable experience working on climate change policy issues in the U.S. government
Scott Barrett, professor of natural resource economics at Columbia University, and an authority on infectious disease policy
Rebecca Henderson, John and Natty McArthur University Professor at Harvard University, and founding co-director of the Business and Environment Initiative at Harvard Business School.
Sue Biniaz, who was the lead climate lawyer and a lead climate negotiator for the United States from 1989 until early 2017.
Richard Schmalensee, the Howard W. Johnson Professor of Management, and Professor of Economics Emeritus at the Massachusetts Institute of Technology.
Kelley Kizier, Associate Vice President for International Climate at the Environmental Defense Fund.
David Hone, Chief Climate Change Adviser, Shell International.
Vicky Bailey, 30 years of experience in corporate and government positions in the energy sector.
David Victor, professor of international relations at the University of California, San Diego.
Lisa Friedman, reporter on the climate desk at the The New York Times.
Coral Davenport, who covers energy and environmental policy for The New York Times from Washington.
Spencer Dale, BP Group Chief Economist.
Richard Revesz, professor at the NYU School of Law.
Daniel Esty, Hillhouse Professor of Environment and Law at Yale University.
William Hogan, Raymond Plank Research Professor of Global Energy Policy at Harvard.
Jody Freeman, Archibald Cox Professor of Law at Harvard Law School.
John Graham, Dean Emeritus, Paul O’Neill School of Public and Environmental Affairs, Indiana University.
Gernot Wagner, Clinical Associate Professor at New York University.
John Holdren, Research Professor, Harvard Kennedy School.
Larry Goulder, Shuzo Nishihara Professor of Environmental and Resource Economics, Stanford University.
Suzi Kerr, Chief Economist, Environmental Defense Fund.
Sheila Olmstead, Professor of Public Affairs, LBJ School of Public Affairs, University of Texas, Austin.
Robert Pindyck, Bank of Tokyo-Mitsubishi Professor of Economics and Finance, MIT Sloan School of Management.
Gilbert Metcalf, Professor of Economics, Tufts University.
Navroz Dubash, Professor, Centre for Policy Research, New Delhi.
Paul Joskow, Elizabeth and James Killian Professor of Economics emeritus, MIT.
Maureen Cropper, Distinguished University Professor, University of Maryland.

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.

What’s in a Name? Wine, Economics, and Terroir

Today, I’m pleased to offer a temporary respite from analysis of climate change policy (and other environmental policies, for that matter), while remaining well within the general province of environmental and natural resource economics. I do this through a merger of profession and avocation, in my case, economics and oenonomy (the study – as well as the enjoyment – of fine wine).

A Blend of Economy and Oenonomy

As some readers may know, in addition to having served as the founding Editor (and current Co-Editor) of the Review of Environmental Economics and Policy, I have had the distinct pleasure of being one of the founding Editors (along with Kym Anderson, Orley Ashenfelter, Victor Ginsburgh, and Karl Storchmann) of the Journal of Wine Economics. If you’re laughing, let me quickly note that the Journal consists of serious, refereed articles, many by leading economists, and has been referenced by the New York Times, The Economist, and The Financial Times. And – in what may be our high point or low point, depending upon your perspective – a discussion paper from the affiliated American Association of Wine Economists was referenced – and mocked – by Stephen Colbert on his “Colbert Report.”

A New Article

In an article that is forthcoming in the Journal of Wine Economics, Robin Cross, Andrew Plantinga (both of the Department of Agricultural and Resource Economics at Oregon State University), and I examine a concept that is central to the thinking of wine geeks around the world – terroir. The Journal article – “The Value of Terroir: Hedonic Estimation of Vineyard Sale Prices” – has not yet been published, but a brief version of our analysis – “What is the Value of Terroir?” – has just been published in the American Economic Review Papers and Proceedings 2011, and so I’m pleased to provide an even briefer summary here (quoting and paraphrasing from our AER P&P article) – both for wine geeks and for others. First, however, let me acknowledge Chuck Mason and other participants in a session at the 2011 American Economic Association meetings for having offered helpful comments on a previous version of the paper. Now, to the subject at hand.

Some Background

Wine producers and enthusiasts use the term “terroir,” from the French terre (meaning land), to refer to the special characteristics of a place that impart unique qualities to the wine produced. The Appellation d’Origine Contrôlée (AOC) system in France, and similar systems adopted in other wine-producing countries, are based upon the geographic location of grape production, predicated on this notion of terroir. Under the U.S. system, production regions are designated as American Viticultural Areas (AVAs), with finer geographical designations known as sub-AVAs. Such designations allow wineries to identify the geographical origin of the grapes used in producing their wines, and – equally important – seek to prevent producers outside an AVA from making false claims about the nature and origin of their wines.

Some Empirical Questions

“What is the value of terroir in the American context?” Does the “reality of terroir” – the location-specific geology and geography – predominate in determining the quality of wine? Does the “concept of terroir” – the location within an officially named appellation – impart additional value to grapes and wine? Does location within such an appellation impart additional value to vineyards?

The central question we sought to address in this work was whether measurable site attributes – such as slope, aspect, elevation, and soil type – or appellation designations are more important determinants of vineyard prices. We did this by conducting a hedonic price analysis to investigate sales of vineyards in Oregon’s Willamette Valley, one of the most important wine-producing regions in the United States.

Thinking About These Questions

How should site attributes and sub-AVA designations influence vineyard prices? If site attributes significantly affect wine quality and if consumers are able to discriminate such quality, then vineyard prices would depend on site attributes, and AVA designations might be redundant.

Alternatively, consumers might not be able to discriminate among wines perfectly and might use AVA designations as signals of average quality of wines from respective areas, and/or might derive utility directly from drinking wines which they know to be of particular pedigree. In this case, site attributes and AVA designations would influence vineyard prices, with parameters for site attributes indicating how producers value intra-AVA differences in vineyard characteristics. Presumably, producers attach premiums to site attributes that enhance wine quality, provided that consumers can perceive and are willing to pay for such quality differences.

What if, at the extreme, variation in vineyard prices were explained completely by AVA designations (that is, site attributes are irrelevant)? This would indicate that terroir matters economically – as a concept, though not as a fundamental reality. In other words, producers recognize the value of the AVA designation because they know that consumers will pay more for the experience of drinking wine from designated areas. (Likewise, producers might bid up the value of vineyards located in designated appellations because there is prestige associated with owning vineyards in these areas.) But if site attributes known to affect wine quality have no impact on vineyard prices, this would suggest that consumers cannot discern quality differences. Any appreciation they might express for an area’s terroir would essentially be founded on reputation, not reality.

Our Analysis

We estimated a hedonic model of vineyard prices in Oregon to examine whether such prices vary systematically with designated appellation, after controlling for site attributes. In other words, we carried out an econometric (statistical) analysis to examine the factors that appear to affect vineyard prices.

We employed a new data set we developed on vineyard sales with extensive information about respective properties, combined with GIS-based information on specific parcels. In our sample (actually, the universe of sales of vineyard – and potential vineyard – properties in the Willamette Valley between 1995 and 2007), the average price of vineyards was about $10,000 per acre, with prices ranging from $2,500 to $42,000 per acre.

We also carried out a check on our vineyard pricing analysis by examining price premiums paid by consumers for wines from related origins. If you’d like to read about either methodology, or see our quantitative results, please take a look at the article. But, for now, I will just summarize our results.

Some Answers

We found that vineyard prices are strongly determined by location within specific sub-AVAs, but not by site attributes. These appellations are supposed to reflect the area’s terroir, but our finding that the physical characteristics of vineyards are not priced implicitly in land markets raises questions about whether sub-AVA designations have a fundamental connection with terroir.

On the other hand, our results make clear that the concept of terroir matters economically, both to consumers and to wine producers. Buyers and sellers of vineyard parcels in the Willamette Valley of Oregon attach a significant premium to sub-AVA designations. One possibility is that buyers are less informed than sellers about how the attributes of a vineyard will affect wine quality and, therefore, rely on sub-AVA designations as quality signals.

In any event, consumers are evidently willing to pay more for the experience of drinking wines from these areas. While they may not discriminate among wines in terms of their intrinsic qualities, consumers are apparently responding to extrinsic qualities of wines, such as price and area of origin. So, terroir survives – as a concept, but somewhat less as a fundamental reality.