Saturday, September 25, 2010

The Microeconomics of Climate Change Adaptation

Climate change will be a world public bad.  Paul Samuelson has taught us that our aggregate willingness to pay for a public good is the sum of individual willingness to pay.  So, how much are each of us willing to pay to avoid climate change?  This depends on your circumstances (endowments, information, preferences) and the severity of climate change (is atmospheric CO2 levels at 400 ppm or 750 ppm or 1000 ppm). 

Most environmental economists have adopted a "macro" perspective in analyzing climate change. Prominent examples include  Nordhaus and Weitzman.   Such macro approaches implicitly assume that there is no relevant within variation.  For example, the Nordhaus RICE model examines how the United States will be affected by climate change.  But within the United States, there is likely to be huge variation in how different parcels of land are affected by climate change.  There will be locations badly hurt and other locations much less affected.  Climate scientists (not economists) will identify these.   If we move economic activity gradually over time to the less affected areas, what does this mean about the long run costs of climate change? I think that we will over-state them.

I wrote Climatopolis because I saw a "hole" in the literature.  There is so much attention focused on carbon mitigation that microeconomists haven't written much on adaptation.  Given that we have made very little progress on capping global emissions (they continue to rise), it is the job of the microeconomist to explain and predict how different individuals will cope with climate change.  Climatopolis fills this gap.

It optimistically argues that for any given level of warming that urbanites around the world have access to a set of coping strategies (i.e migration and innovation) that will help to lessen the impact of climate change on our urban life.  This doesn't mean that climate change is good.  This doesn't mean that we "easily handle" climate change.   We are not fatalist passive "victims" in the face of anticipated challenges. We are self interested and forward looking.  This helps us to protect ourselves against an anticipated but uncertain foe and lowers the aggregate costs that it will impose on us. 

Macro researchers posit a structural production function mapping temperature into per-capita income.  This is one strategy for creating a "closed loop" such that rising average temperature lowers an economy's overall well being. My point is that individual choice and self protective actions means that this mapping is not a "structural equation".  Over time, the impact of temperature on per-capita income will decline because of private actions.

How much will our actions help to shield us from climate change's risks?  You should win a Nobel Prize if you can answer that. Climatopolis isn't that ambitious. It merely seeks to start a discussion and to help nuanced people think about how our future will play out even if the international free rider problem proves impossible to overcome.

Some critics of Climatopolis haven't actually read the book.  I'd suggest reading page 237. "I do not intend for this book to lull moderates ino thinking that "since we can adapt, we don't need to mitigate." ... "Reducing carbon emissions now will make the future challenge to adapt easier to face."

An individual's willingness to pay to avoid climate change depends on how her life (and her children's life) will be affected by climate change.  Each household will have to envision the extra risks and discomforts that climate change will introduce.  If you can easily move to a city facing little risk and rent a nice apartment there, then you suffer little.  Conversely, if you are stuck in a flood zone and unable to move --- you will suffer greatly. 

Climatopolis argues that climate science will improve and provide more accurate leading indicators of what risks we face and that self interested households will respond to this information and firms will respond by innovating to develop products to  help households cope with climate change. In this sense, the evolutionary nature of capitalism protects people in both the developed and developing world.  In the developing world, further economic development over the next 50 years will protect billions of people.  Again, I would ask my critics to read my paper The Death Toll from Natural Disasters  . The best way to help protect the poor from climate change risk is to help their nation's grow their per-capita GNP.  

Given today's technologies, such development will exacerbate the mitigation challenge. It is my hope that as nations such as India and China develop that their middle class will support carbon regulation and this help create a political basis for an international treaty.    I discuss this on pages 146-151 of the book.