Mitigating Disaster Risks in the Age of Climate Change

Emissions abatement alone cannot address the consequences of global warming for weather disasters. We model how society adapts to manage disaster risks to capital stock. Optimal adaptation --- a mix of firm-level efforts and public spending --- varies as society learns about the adverse consequences of global warming for disaster arrivals. Taxes on capital are needed alongside those on carbon to achieve the first best. We apply our model to country-level control of flooding from tropical cyclones. Learning rationalizes empirical findings, including the responses of Tobin's q, equity risk premium, and risk-free rate to disaster arrivals. Adaptation is more valuable under learning than a counterfactual no-learning environment. Learning alters social-cost-of-carbon projections due to the interaction of uncertainty resolution and endogenous adaptive response.

Keywords: Weather Disasters, Growth, Learning, Mitigation, Market Failure, Climate Change, Social Cost of Carbon

JEL Classification: H56, G01, E20

Suggested Citation: Suggested Citation

Hong, Harrison G. and Wang, Neng and Yang, Jinqiang, Mitigating Disaster Risks in the Age of Climate Change (May 28, 2023). Econometrica, Available at SSRN: https://ssrn.com/abstract=3572457 or http://dx.doi.org/10.2139/ssrn.3572457