Development strategies of agricultural sector toward environmental externalities: Case study in East Java, Indonesia

This research was conducted to measure the agricultural sector's externalities and to generate a model of proper strategies to encourage sustainable economic development through the agricultural sector. This research employed time-series data of 1987-2016 periods at selected province in Indonesia (East Java). Agricultural sector's externalities were addressed by environmental degradation variables (greenhouse gas emissions) and environmental carrying capacity variable. The 2006 IPCC guidelines for green house gas inventories tier 1 and land balance approach was utilized to calculate those externalities. Furthermore, for generating a model of proper strategies, the second law of thermodynamics was applied through a simultaneous equation model that was analyzed with Two-Stage Least Square method. This research revealed that agricultural income, environmental degradation, and environmental capacity have simultaneously significant interrelationship. Intensifying credit allocation for rural farm household and adding direct investment in the agriculture sector can decrease environmental degradation, escalate environmental carrying capacity, and increase agricultural income.