Growth and adaptation to climate change in the long run

Abstract

As the climate is changing, the global economy is adapting. This paper describes a novel method of estimating climate adaptation globally. We quantify how much the global economy has adapted to climate change historically, how much it has cost, and how much it has reduced the direct impacts of climate change. The method is based on a structurally estimated model of long-run growth, which identifies how changes in consumption, fertility, innovation, and land use allow the economy to adapt to climate change. Agriculture plays a key role, because it is vulnerable to climate change and food cannot be perfectly substituted. We estimate that adaptation has been highly effective in reducing negative climate impacts on agricultural production. However, the cost of adaptation has been a reallocation of resources out of the rest of the economy, which has in effect slowed down the process of structural change out of agriculture into manufacturing and services. We also use the model to estimate optimal future carbon taxation. Because adaptation is effective but costly, reducing future greenhouse gas emissions would improve welfare substantially.