The Economics of Climate Change Adaptation

1. The Economics of Climate Change Adaptation Bangkok 2012 Robert Mendelsohn Yale University

2. Policy Questions • What is adaptation? • What is the objective of adaptation? • What should be done? • When should they occur? • Where should they be done?

3. What is adaptation? • Change in behavior in response to climate change. • Examples: alter infrastructure, use air conditioning, change to heat-loving crops, alter water management, control new diseases • Not reduction in greenhouse gas emissions as the primary objective- that is mitigation

4. Autonomous Adaptation • Autonomous • private decision for private benefit • self interest to perform • will be done without policy • Examples: • Farmer shifting from crops to animals • Forester changing timber species • Household installing and using cooling

5. Public Adaptation • Adaptations that benefit many (jointly consumed) • Market will struggle to produce • Requires government to act • Examples • Conservation • Flood control planning • Technical change

6. Reactive Adaptation • Wait until climate changes and then adapt • Ideal for short run decisions- use cost benefit analysis • Because reactive adaptation depends on observed weather, climate change is certain • Requires decision maker to be up to date about the climate

7. Planned Adaptation • Make decision now before climate changes • Necessary for long run decisions such as capital investments • Drawback is that local climate change is uncertain

8. Objective of All Adaptation • Maximize net benefits (benefits minus costs) given that local climate has changed • Match to local climate change impacts • Not “climate proofing”- some damages will persist- don’t spend $2 to get rid of a $1 problem

9. What Economic Tool to Use? • Project analysis requires a cost benefit study weighing alternatives of project design • Large scale analyses for entire sectors requires market analyses to see how entire economic system is affected

10. Example of Project Analysis:Cost Benefit • Suppose a low dam costs $1 billion, a high dam costs $1.5 billion and with current climate, a low dam has benefits of $1.2 billion and high dam of $1.6 billion- low dam is better with $200 million net gain • With future wetter climate, suppose benefit of low dam rises to $1.3 billion and benefit of high dam rises to $2 billion- high dam now better option with $500 million net gain

11. System Wide Change:Market Analysis • Suppose adaptation involves farmers shifting from maize to fruit (more heat loving) • At current prices, many farmers would switch as climate warms • However, as supply of maize falls, maize price rises and as supply of fruit increases, fruit price falls. • System wide adjustment suggests that less farmers should make switch given price changes

12. Where Should Adaptation be Done? • Everywhere, but priority to places where climate change is having largest impact (low latitudes)- more people- more sensitive • Not necessarily places with largest climate change (Arctic)

13. What sectors are at risk? • Market: agriculture by far the largest, energy, water, coastal, and forestry • Nonmarket: ecosystem change (species loss, shifting systems), health, recreation

14. How will impacts be distributed? • Impacts fall most heavily in low latitude poor countries (could bear 70+% of damages) • Benefits in mid to high latitude countries • Impacts grow with time as climate continues to change • Impacts vary depending on the climate model

16. Can detailed impacts be predicted? • Impact analyses reveals hill shaped relationship with temperature (and precipitation) • Benefits to farms and people in cool locations • Damages to farms and people in warm locations • Impacts vary a great deal across the landscape

17. Marginal temperature effect on rainfed farms in China

18. Marginal temperature effect on irrigated farms in China

19. Timing • Timing is critical to success of many adaptations • Done too soon, raises cost and can be ineffective (new crop before warm enough will not grow well) • Done too late, damages can be large (as if there is no adaptation) • Matching adaptation to potential damages, the bulk of adaptation actions need to be done in the second half of this century

20. Global Net Market Impacts over Time

21. What should governments do? • Help autonomous adaptation • Encourage private responsibility for resources • Inform private actors of climate changes and adaptation options • Manage public adaptations (shared benefits, externalities) • Address fairness of impacts (Equity/Inequality issues)

22. Common Property • Requires collective action to protect • Individual users will not adapt • Overharvest common forests or fisheries, overgraze grasslands, overutilize water resources • Climate change will make these current problems worse by making these resources more scarce • Need to increase responsibility over management of resources (property rights issue)

23. Nonmarket Adaptations • Public health responses to potential illnesses and heat stress • Retreat options for marshes and mangroves against sea level rise • Flexible conservation zones for species migration to new habitat

24. Externalities • Secondary ozone pollution formation will require tighter regulations on emissions • Flooding will require system wide land use regulations and flood control planning

25. Severe Weather Events • Adapt now to hurricanes, droughts, and floods because current problem • Severe events likely to cause more damage in the future as economy grows • If severe event frequency or severity changes, adjust programs accordingly

26. Can poor adapt? • Poor do autonomous adaptation • For example, household farms may adapt better than commercial farms because more diversified (less specialized) • Can help poor for equity reasons: but must be careful not to provide mal-incentives discouraging adaptation such as subsidized insurance (market distortions)

27. What adaptation can be done now? • Reactive adaptation to the current climate • Manage public adaptation (conservation, health, coastal protection) • Engage in planning and research to get ready • Encourage institutional changes: improve public management and markets for natural resources (land, water, fisheries) • Help developing economies grow and move away from climate-sensitive economic sectors- such as agriculture