State of the Art on the Economics of Adaptation

Introduction to the special issue on adapting institutions to climate change

“…First, standard economic accounts of climate adaptation have pointed at problems connected with public goods, moral hazard and adverse selection, leading to both market and government failure (e.g. IPCC 2014; Mendelsohn 2006; Osberghaus et al 2010), limiting the ability of market processes to address the challenges posed by climate change (Scrieciu et al 2013; Surminski 2013), and challenging the applicability of those policy instruments in the economist's toolbox (Fankhauser and Soare 2013; Heuson et al 2012). This, alone, is a clear call for an institutional economics approach to adaptation, as institutional economics transcends the market–state dichotomy (Ostrom 1990).…”

‘Test Driving’ a Financing Instrument for Climate Adaptation: Analyzing Institutional Dilemmas using Simulation Gaming

“…More recently, according to a 2013 report issued by the European Environmental Agency, while municipalities have some limitations, particularly with respect to interjurisdictional issues (such as broad-scale flooding impacts), local governments are well positioned to undertake concrete implementation actions using municipal resources and/or raising funds from other sources (Isoard & Winograd, 2013). In addition to regulatory solutions, scholarly and policy-oriented research suggests that market-based mechanisms hold some promise to create conditions for efficient and appropriate solutions (Buchner et al, 2011;Heuson et al, 2012;Mathews & Kidney, 2012). Other researchers have analyzed possible incentives to attract private investment at the local level, which minimally includes a policy framework that is simple, predictable, and protects property rights (Merk et al, 2012).…”

Public Choice barriers to efficient climate adaptation – theoretical insights and lessons learned from German flood disasters

“…This is aggravated by the fact that adaptation measures are often not easy to define and delimit from measures belonging to other public fields of action (which part of flood risk management policy is due to climate change?). For the general public it is thus difficult to state a clear preference for adaptation at all (Heuson et al , 2012). Combined with highly uncertain and often long-term impacts and bounded rationality of individuals in terms of temporal inconsistencies, the general public's preferences are likely to underrepresent the true social benefit of public adaptation (type II barrier).…”

“…Economic theory suggests that in terms of timing , adaptation investments should be postponed as long as the benefits of postponement (avoided investment costs) are greater than the associated costs (higher climate change damages). As regards the form of adaptation, efficiency demands an explicit solution of trade-offs so as to equate marginal benefits across measures (for an overview of the economics of climate adaptation, see Heuson et al , 2012). Yet in practice a number of Public Choice barriers to efficiency are to be expected.…”