The Economics of Climate Change Adaptation

1. The Economics of Climate Change Adaptation Bangkok September 2013 Robert Mendelsohn Yale University

2. What is adaptation? • Change in behavior in response to climate change. • Examples: avoid running in hot weather, buy air conditioning, change to heat-loving crops, adjust water management, control disease causing pests, build sea wall

3. Economics of Adaptation • Maximize net benefits (benefits minus costs) given that local climate has changed • Match to local climate change impacts • Only do adaptations if the benefit exceeds the cost

4. Timing • Done too soon, adaptations can raise costs and be ineffective (plant new crop before warm enough to grow well- build sea wall long before needed) • Done too late, damages can be large (as if there is no adaptation) • Because adaptation actions must wait for potential damages, the bulk of adaptation actions need to be done in the second half of this century

5. Private Adaptation • Action taken to benefit self • self interest to perform • will be done without help • Examples: • Farmer switching crop and animal species • Household adopting cooling (a fan or air conditioner) • Firm adjusting production as water becomes scarce

6. Public Adaptation • Actions taken to benefit many (jointly consumed) • Examples • Conservation • Benefit all who like nature • Flood control planning • Benefit people subject to floods • Sea walls • Protects all behind the wall

7. What adaptation will markets do? • Firms will conduct private adaptations for their own benefit • Farmers will adapt • Market will not do public adaptations • No mechanism to earn profit • Market will not overcome externalities such as pollution • Market will perform badly without property rights

8. What should governments do? • Help create setting to encourage markets and private ownership of private resources • Transform common property • Enforce private property rights • Help do public adaptations (shared benefits, externalities) • Address fairness of impacts

9. Severe Weather Events • Can adapt now to hurricanes, droughts, floods because current problem • Severe events likely to cause more damage in the future as economy grows • Greenhouse gases may make some severe weather worse

10. What adaptation can be done now? • Adapt to current weather • Do planning and research to get ready • Encourage institutional changes: improve public management and markets for natural resources (land, water, fisheries) • Help the economy of developing countries grow and become less dependent on climate sensitive economic sectors- namely agriculture