Can market mechanisms ameliorate the effects of long-term climate change?

Abstract

Land prices, insurance rates, future markets, mortgage terms, and other market mechanisms may be expected to guide short-term economic response to climatic change as its effects become apparent to investors. On the other hand, the pervasive influence of discount rates on investment decisions makes it unlikely that the market will give satisfactory guidance to investments that must be undertaken long before the appearance of the climatic effect they are intended to mitigate. For this reason, only government is likely to undertake such long-term investments as large civil works intended to modify hydrology (irrigation, seawall dikes), and research and development in agriculture or other technologies which need to be adapted to new climatic conditions, while the effects of climate change are still distant and uncertain.

Decisions regarding very large ‘macroprojects’, as well as decisions which determine the siting of installations that have long-term consequences for the environment (e.g., dump sites for disposal of long-term hazardous wastes) should carefully consider the effects of climate change regardless of current market signals. Strategic planners for government and industry should take steps now to identify those decisions for which planning is now beginning, and which need to take into account the effects of long-term climate change.