Climate Change Economics

We put in perspective the papers in this special issue by characterizing different forms of adaptation to climate change and discussing the role of adaptation in a developing country context. We highlight adaptation decision-making under uncertainty, empirics of autonomous adaptation, and data and methodological challenges. We identify unresolved questions, emphasizing interactions between autonomous and planned adaptation, adaptation externalities, and the relationship between adaptation and conflict.

Adaptations are changes in behavior and capital motivated by climate change. Economic theory suggests that adaptations are efficient (desirable) only if their benefit exceeds their cost. Private adaptations are likely to be efficient because the benefits and cost accrue to the decision maker. With some important exceptions, private adaptation is likely to be done efficiently by markets. Public adaptations, however, benefit many people. Markets are not likely to make efficient public adaptations because they cannot coordinate payments from multiple consumers. Governments need to be responsible for public adaptations. However, government must think carefully about being efficient. Empirically, little is known about what precise changes in behavior are efficient, where such changes should take place and when they should take place. The empirical literature has largely focused on how actors have adapted to the current range of climates across the earth. From these studies, researchers are extrapolating what changes would make sense in the future as climate changes. The results suggest that adaptations are local in nature and therefore look like patchwork adjustments across space. They depend on the current local climate, how it changes and the various local conditions. Although public adaptations in health and conservation look promising, there are virtually no economic analyses of their potential. Overall, adaptation can be very effective at reducing damages, for example, by building sea walls to protect from inundation, and seizing new opportunities, for example, by growing in crops in places that were previously too cold. Research must now focus on making the practical steps that turn that potential into reality.

We present a model of technological adaptation in response to a change in climate conditions. The main feature of the model is that new technologies are not just risky, but also ambiguous. Pessimistic agents are thus averse to adopting a new technology. Learning is induced by optimists, who are willing to try out technologies about which there is little evidence available. We show that both optimists and pessimists are crucial for a successful adaptation. While optimists provide the public good of information which gives pessimists an incentive to innovate, pessimists choose the new technology persistently in the long-run which increases the average returns for the society. Hence, the optimal share of optimists in the society is strictly positive. When the share of optimists in the society is too low, innovation is slow and the obtained steady-state is inefficient. We discuss two policies which can potentially alleviate this inefficiency: Subsidies and provision of additional information. We show that if precise and relevant information is available, pessimists would be willing to pay for it and consequently adopt the new technology. Hence, providing information might be a more efficient policy, which is both self-financing and results in better social outcomes.

Adaptation to climate change is likely to be a significant challenge for developing countries. We examine whether a real options approach that recognizes uncertainty and maintains future flexibility can provide an improved adaptation investment strategy. We use a Monte Carlo model to test four strategies for defending against sea level rise. Two of the strategies are inflexible, with the coastal defense fully specified in the first year of analysis. The other two strategies are flexible real options that allow adjustments in the coastal defense over time. We emphatically show that a real options strategy has the potential to increase the benefits of proactive adaptation. Our results prove to be location-dependent, underscoring the need for location-specific analysis. We find that the quality of the information obtained over time has an important bearing on option value and that a country's institutional capability and the specific mechanisms of international development assistance may affect implementation.

This paper presents an empirical analysis of the role of different climate change adaptation strategies in supporting food productivity in Ethiopia. The analysis relies on unique primary survey data on 1000 farms producing cereal crops in the Nile Basin, Ethiopia. Based on monthly collected meteorological station data, the Thin Plate Spline method of spatial interpolation is used to impute the household specific rainfall and temperature values of each household. The rainfall data is disaggregated at season level (Meher and Belg). Econometric results show that the implementation of adaptation strategies supports farm productivity. Changing crops is found to be the most successful strategy, followed by the implementation of soil conservation and tree planting. We complement the analysis with some evidence on the determinants of adaptation. We find that extension services (both formal and farmer-to-farmer) and information on future climate changes affect positively and significantly the probability of adaptation through changing crops and tree planting. This finding highlights the crucial role played by information dissemination in improving farmers' decision-making.

Heat waves, defined as an interval of abnormally hot and humid weather, have become a prominent killer in recent years. With heat waves worsening with climate change, adaptation is essential; one strategy has been to issue heat wave warnings and undertake awareness campaigns to bring about behavioral changes to reduce heat stroke. Since 2002, the Indian state of Odisha has been undertaking a grassroots awareness campaign on "dos and don'ts" during heat wave conditions through the disaster risk management (DRM) program. The selection criteria for DRM districts were earthquake, flood and cyclone incidence; but subsequently, heat wave awareness also received intensive attention in these districts. We present quasi-experimental evidence on the impact of the program, taking DRM districts and periods as treatment units and the rest as controls, analyzing the impact on the death toll from heat stroke for the 1998 to 2010 period, using difference-in-difference (DID) regressions with a district level panel data set and a set of control variables. We find indications of program effectiveness with initial DID specifications, but results are not always robust. We then take into account a statewide heat wave advertising program, to which the poor have limited exposure but which may also provide spillover benefits, using a triple differencing approach; results suggest the heat wave awareness programs may have complementary impacts. We examine research strategies for further improvement in the precision of impact evaluation results for innovative programs of this type.

Understanding the feasibility and cost of adaptation is essential to management of the global climate. Unfortunately, we lack general estimates of adaptive responses to almost all climatological processes. To address this for one phenomenon, we estimate the extent of adaptation to tropical cyclones (TCs) using the global cross-section of countries. We reconstruct every TC observed during 1950–2008 to parameterize countries' TC climate and year-to-year TC exposure. We then look for evidence of adaptation by comparing deaths and damages from physically similar TC events across countries with different TC climatologies. We find that countries with more intense TC climates suffer lower marginal losses from an actual TC event, indicating that adaptation to this climatological risk occurs but that it is costly. Overall, there is strong evidence that it is both feasible and cost-effective for countries with intense TC climatologies to invest heavily in adaptation. However, marginal changes from countries' current TC climates generate persistent losses, of which only ~3% is "adapted away" in the long run.