ADAPTATION TO CLIMATE CHANGE AND CLIMATE VARIABILITY: DO IT NOW OR WAIT AND SEE?

Abstract

As growing attention is paid to climate change adaptation as an actual policy issue, the significant meaning of climate variability in adaptation decisions is beginning to be recognized. By using a real option framework for adaptation in agricultural production, we shed light on how climate change and climate variability affect individuals' (farmers') investment decisions with regard to adaptation (switching from rainfed to irrigated farming). The option value delays adaptation easily for several decades with a realistic set of parameter levels, implying a critical role of risk sharing in promoting adaptation. When variability-influenced adaptation involves the use of an open-access resource (groundwater), uncoordinated farmers may adapt too early or too late depending on the level of their risk aversion. Private adaptation should be supported or discouraged accordingly if coordination is infeasible or farmers are not convinced about the possibilities of collective resource management in the long run.