Optimal growth with adaptation to climate change

Abstract

We find that approximately a quarter of the world’s productive capital could be sensitive to climate; therefore, this capital faces the risk of accelerated obsolescence in a world warming by an average of 0.2 °C per decade. We examine the question of optimal adaptation to climate change in a vintage capital growth model without uncertainty. Along the optimal pathway, adaptation is proactive with an anticipation period of approximately twenty years. While there is additional investment in this scenario compared with a no-climate-change baseline, the overall cost to adapt is low relative to the potential losses from maladaptation. Over-investment in protection capital allows the economy to be consistently well-adapted to climate; thus, such a policy prevents transient maladaptation costs. Sensitivity analysis with an integrated assessment model suggests that costs could be ten times larger if adaptation only begins after vulnerable sectors are impacted.

Appendix: Calibration

The emission function parameters and the technical change rate are fitted using the SRES A1 scenario trajectory from the AIM model (Intergovernmental Panel on Climate Change 2000). The initial protection capital is only composed of one type of capital, which is the capital associated with the initial temperature. It is assumed that at the starting point the economy is on the balanced growth path. To scale the production function, it is assumed that

$$ K^T_0 = (1-\nu) K_0 + {\left(\eta {(\nu K_0)}^\rho + \gamma {\left(K^1_0\right)}^\rho\right)}^{\frac{1}{\rho}} $$

(11)

The number of different protection capital types is chosen sufficiently high such that it does not influence the result. In the central case, model parameters are defined as in Table 4 below:

Table 4 Model parameters, central case