Thursday, December 1, 2016

Climate Change from an Economics Perspective: Part II

In an earlier post, we talked about climate change (see here), about the many aspects of climate change that are still surrounded by a great deal of uncertainty, and about mitigation strategies and challenges. This time, we will focus on adaptation to climate change, especially as it relates to small countries in terms of their greenhouse gas emissions.
Mitigation and adaptation are the two main prongs of the overarching strategy for dealing with climate change. The term “mitigation” refers to measures that help to reduce greenhouse gas emissions or to heighten the capacity of carbon sinks – measures that will lower the probability of negative climate change shocks in the future. The term “adaptation” refers to measures that will help to forestall and/or offset the effects of climate change. It is reasonable to suppose that the types of measures that each country decides to adopt will depend on the costs and benefits that they represent for that country’s economy. A decline in atmospheric CO2 emissions would appear to be a fairly ineffective strategy for Latin America and the Caribbean but a comparatively more effective one in, for example, the United States. Thus, the optimal strategies may differ from one country to another, with countries that produce higher levels of emissions choosing different policies from those selected by ones with lower levels of emissions (in the absence of a global binding agreement).
In an effort to plot the optimal expenditure paths for spending on mitigation and adaptation in different scenarios, Chisari, Galiani and Miller (2016) developed an analytic model and then calibrated it for what they describe as environmentally large, medium-sized and small economies (in terms of the emissions that they generate). That paper looked at the different kinds of measures that different economies would be willing to undertake if they were to optimize their expenditure on adaptation and mitigation in the absence of a global policy or, in other words, if there were no constraints on the environmental policies that they could pursue.
The results led to the following findings. First, small economies will tend to focus their environmental efforts, if they undertake them at all, on adaptation. Not only are large countries likely to spend more on mitigation and adaptation in absolute terms, but the mitigation/adaptation ratio will also tend to be higher in those economies. Second, small economies that cannot spend enough on adaptation measures will probably spend even less on mitigation measures, ceteris paribus, as future adverse climate effects impoverish them. Third, higher mitigation expenditures may arise not only as a result of greater optimal adaptation expenditures, but also because richer countries may provide more attractive external mitigation incentives.
International incentives (in the form of potential rewards and penalties) are still skewed toward mitigation. The potential rewards include access to financial assistance and technology transfer, while potential sanctions could include carbon taxes on exports and their transport. It is unlikely, however, that incentive schemes will incorporate broad sanctions in the form of trade restrictions any time soon.
Much less progress has been made in terms of adaptation at the international level. Considerably less funding has been made available, and the cost-effectiveness of the possible alternative measures has not yet been assessed. Adaptation entails a number of different dimensions, such as access to water, protection against human and crop diseases, assistance for the poor, and urban and infrastructure development.
In addition, the methods for arriving at estimates of the cost-effectiveness of mitigation and adaptation measures necessarily differ. The effectiveness of a given mitigation policy is measured on the basis of the reduction in the amount of greenhouse gas emissions that will be achieved by means of its implementation. Whether and how this translates into the avoidance of some degree of global warming remains to be seen, but this metric has allowed researchers and politicians to rank mitigation policies in terms of their cost-effectiveness. No such estimates are yet available for adaptation, mostly because policies for each sector translate into different kinds of damage avoidance that must then be monetized in order to gauge the results in monetary terms; only once that has been done can they be prioritized on the basis of their cost-effectiveness.
Some types of adaptation measures can be put in place right away at a low cost, such as early warning systems and new building and infrastructure regulations. Others will be costlier and may have to be deferred until more information is available. R&D focusing on the needs of each region can serve as a cost-effective learning process. There are as yet no well-developed, economically sound guidelines for the assessment of various adaptation measures in this field. Guidelines of this sort would be helpful in classifying different projects or measures under conditions of resource scarcity, especially in view of the fact that climate change is not the only challenge facing developing countries. The current priority for Latin America is thus to develop its working agenda for dealing with climate change.
In the medium term, a key factor in adaptation efforts will be the mobility of factors of production, particularly labor, which is limited at present. This will be a major challenge for the international community and one that should be addressed well in advance.

By: Sebastian Galiani

Chisari, O. and S. Galiani, 2010. Climate Change: A Research Agenda for Latin America and the Caribbean. IDB Technical Notes No. 164.
Chisari, O, S. Galiani and S. Miller, 2016. “Optimal Climate Change Adaptation and Mitigation to Climate Change in Small Environmental Economies”. Economia, Journal of the Latin American and Caribbean Economic Association.
Feld, B. and S. Galiani, 2015. Climate change in Latin America and the Caribbean: Policy options and research priorities. Latin American Economic Review, Volume 24, 2015, pages 150-188. 

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