MODELING OF ENVIRONMENTAL ADAPTATION: AMENITY VERSUS PRODUCTIVITY AND MODERNIZATION

Abstract

We develop an aggregated model to study rational environmental adaptation policies that compensate negative consequences of climate change. The model distinguishes three categories of adaptation measures that (a) compensate the decrease of environmental amenity value, (b) compensate the decrease of total productivity, (c) develop and introduce new hazard-protected capital and technology. We analyze the optimal balance among consumption, capital investment, and different categories of adaptation investments under exogenous climate change. It appears that the climate change damage and subsequent adaptation do not lead to a higher level of capital modernization in the long run as compared to the benchmark case with no climate change. A synergism between productivity-related and amenity-related adaptation activities arises because the productivity-related adaptation positively impacts the economy and creates better possibilities for the amenity adaptation.