The Economics of Adaptation to Climate Change - The Case of Germany

Abstract:     
Adaptation to climate change is becoming increasingly important in the political and scientific debate. The reason for this is that climate change impacts are visible already today and will intensify in the next decades. Furthermore, the prospects for an effective international agreement on climate policy with binding emission reduction targets are uncertain. The economic analysis of adaptation, however, is still in its infancy with a few economic studies covering specific aspects of adaptation. Therefore, this paper aims at developing a broad economic framework for adaptation which can provide a foundation and a starting point for future economic research. The economic analysis allows us to distinguish between autonomous adaptation by private agents on the one hand and collective adaptation measures by government entities on the other. Our theoretical economic approach follows the basic economic paradigm of efficient competitive markets where government intervention is justified by market failure only. The most important case of market failure in adaptation is the provision of public goods, such as dykes or weather information systems. Moreover, we discuss further political objectives, namely equity and security of supply, in the context of adaptation to climate change. The approach developed in the theory part is then applied to the case of Germany. Due to its size and geography as well as its relatively diversified sectoral structure Germany is a good example to analyze and develop adaptation measures in climate sensitive sectors in industrialized countries, particularly in Europe. The case study on Germany which is based on the available literature covers sectors that are particularly vulnerable to climate change, namely agriculture, energy, water and coastal protection, and human health. While from an economic perspective adaptation in agriculture and energy should predominantly be autonomous, the government has a role in the sectors water, coastal protection and health. The results indicate that in Germany beside the negative impacts of climate change positive impacts are to be expected in some sectors, such as agriculture. Therefore a differentiated adaptation strategy by consumers, producers, and policy makers requires more research into the climate impacts on different sectors of life and the economy.

Keywords: climate change, adaptation, market failure, insurance

JEL Classifications: Q54, Q58

Working Paper Series