EC330 AT W4: Adaptation

What is adaptation?

Adjustment in natural or human systems in response to actual or expected climatic stimuli, which moderates harm or exploits beneficial opportunities

Why is adaptation important?

can account for the costs and benefits to estimate damage functions

Adaptation channels

Technology adoption and improved practices

• air conditioning moderates temperature-mortality relationship

• agricultural improvements

  • improved seed varieties

  • irrigation

  • crop diversification

  • crop planting dates

Job switching and migration

Production network decisions

Financial arrangements and products

Government policies

Costs of technology adoption and improved practices

• Costs of technologies/learning: High upfront costs or complexity might limit adoption.

• Lab vs. field performance: Technologies that work in experimental settings might not be as effective in real-world conditions.

• Mean vs. variance trade-offs: Some technologies might increase average yields but also increase risk.

• Equity implications: New technologies may not be equally accessible, potentially widening inequalities.

Implications of job switching and migration

• Comparative advantage: As workers switch sectors or locations, regions or countries may specialize differently based on new environmental constraints.

• Sorting: Climate impacts may lead to different demographic or skill-based sorting across regions (e.g. younger or more skilled workers moving away from vulnerable areas).

Production network decisions

Spatial Organization of Firms

Firms adjust where they locate their operations in response to climate risk

Network Linkages and Firm-Level Adaptation

Firms adapt by changing who they do business with, especially when suppliers are climate-exposed.

Sophisticated Firm-Level Adaptive Adjustments

Firms don't just move; they adapt across multiple dimensions.

• Pakistani firms affected by floods adapt by:

  • Relocating to less flood-prone areas

  • Diversifying and choosing more resilient suppliers

  • Using transportation routes less vulnerable to flooding

Financial arrangements and products

Risk Sharing

• Communities share resources to buffer income shocks (e.g. through informal lending or mutual support).

  • Limitation: Less effective when everyone is affected simultaneously, as in aggregate climate shocks (e.g. widespread flooding).

Weather-Based Insurance

• Insurance payouts are triggered by weather conditions (e.g. lack of rainfall), not by direct losses.

  • Issue: Adoption is low, especially in poor or vulnerable areas because:

    • Premiums are seen as too expensive (price sensitive)

    • There may be a lack of trust or understanding of how it works.

Access to Capital Improves Resilience

• Helps people and firms recover faster after a shock

Liquidity Guarantees

• Promises of financial support before a disaster occurs encourage more investment (ex-ante) and enable better recovery afterward (ex-post smoothing).

Examples of government policies

Social Protection

• Workfare programs

  • aim to provide income support and infrastructure development to vulnerable populations.

Connectivity

• Transport and market access

  • help communities access markets, healthcare, and emergency support, improving resilience and recovery after climate shocks.

Policies Mitigating Temperature-Mortality

• Banking expansion (Burgess et al., 2017): Increases financial inclusion, allowing people to save and borrow in times of distress.

• Last-mile healthcare delivery (Banerjee & Maharaj, 2020): Ensures even remote communities can access healthcare during extreme heat or natural disasters.

Cash Transfers

• Conditional cash transfers tied to training can enhance long-term resilience.

• Pre-disaster cash transfers help households prepare before a shock hits, reducing damage and recovery costs.

Challenges for government to implement policies

• Short-term vs. long-term trade-offs: Some investments may not show immediate results but are essential for long-term adaptation.

• Political economy issues: Policies may be hard to implement in politically unstable or highly unequal environments.

• Coordination: Difficulties aligning actions between local and national levels.

• Flexibility: Policies must remain adaptable as climate patterns evolve

Structural modelling of adaptation challenges

Estimates of climate damages are often based on current conditions.

• Effect of temperature increases on current crops

• Effect of sea level rise on current populations

However, in reality, the consequences of climate change will depend on dynamic adjustments

Solutions in modelling adaptation

use general equilibrium models to incorporate such changes into forecasts of climate changes

Advantages of using structural general equilibrium models to estimate impacts of future climate change

• Beyond Reduced Form:
  Structural models are not limited to in-sample variability, unlike reduced-form models. This makes them better suited for counterfactual and policy analysis.

• Handle General Equilibrium Effects:
  can account for economy-wide feedback loops and interactions, which are often missed in simpler models.

• Dynamic Adjustment Over Time:
  can capture how economic agents adjust over long time horizons, which is useful for analyzing policies with long-term effects.

• Welfare Analysis:
  Essential when evaluating the welfare impacts of actual and hypothetical (counterfactual) policy scenarios.

Disadvantages of structural general equilibrium model

1. Strong Assumptions:
   Often depend on rigid functional forms and fixed parameter values, which may not hold in reality.

2. Long-Term Complexity:
   Projecting over long horizons increases uncertainty and can make results sensitive to assumptions.

3. Endogenous Policy Reaction:
   It's difficult to predict how future policies might respond to the economy or to the model's predictions, making forecasting and simulation more complex.