An analysis of adaptation as a response to climate change

Climate change is likely to have relevant effects on our future socio-economic systems. It is therefore important to identify how markets and policy jointly react to expected climate change to protect our societies and well-being. This study addresses this issue by carrying out an integrated analysis of both optimal mitigation and adaptation at the global and regional level. Adaptation responses are disentangled into three different modes: reactive adaptation, proactive (or anticipatory) adaptation, and investments in innovation for adaptation purposes. The size, the timing, the relative contribution to total climate-related damage reduction, and the benefit-cost ratios of each of these strategies are assessed for the world as a whole, and for developed and developing countries in both a cooperative and a non-cooperative setting. The study also takes into account the role of price signals and markets in inducing and diffusing adaptation. This leads to two scenarios: a pessimistic one, in which policy-driven adaptation bears the burden, together with mitigation, of reducing climate damage; and an optimistic one, in which markets also autonomously contribute to reducing some damages by modifying sectoral structure, international trade flows, capital distribution and land allocation. For all scenarios, the costs and benefits of adaptation are assessed using WITCH, an integrated assessment, intertemporal optimization, forward-looking model. Extensive sensitivity analysis with respect to the size of climate damages and of the discount rate has also been carried out. Results can be summarised as follows. Adaptation is an effective means of reducing climaterelated damages. The benefit-cost ratios of adaptation expenditure are larger than one in all scenarios, and for high and low climate damages and discount rates. Nonetheless, benefitcost ratios, and consequently global welfare, are even larger when adaptation and mitigation are implemented jointly. Even though a clear trade-off between adaptation and mitigation has been quantified, they are strategic complements and both contribute to a better control of climate damages. Mitigation prevails in the short-run and/or if the discount rate is low. Market adjustments can substantially attenuate initial negative impacts. Nevertheless, equilibrium climate change damages remain substantial at the global level, particularly in developing countries. Accordingly, the distributional and scale implications of climate-related damages must be addressed by adequate policy-driven mitigation and adaptation strategies. Finally, most adaptation expenditures need to be carried out in developing countries. The size of the required resources is likely to be well beyond their adaptive capacity. Therefore, international cooperation is necessary to transfer resources to developing countries.