Adaptation Mitigation: What is the Optimal Climate Change Policy Mix?

Abstract

In dealing with climate change, how much should governments focus their effort on mitigation (emission reduction to prevent climate change) and on adaptation (coping with a changed climate)? Very little research has gone into pinning down which strategy is dynamically optimal under what kind of conditions. This paper contributes to this debate by developing a parsimonious optimal control model that focuses on the non-linearity of climate change and the presence of multiple countries. Calibrated simulation results are provided to characterize the model. The results show that the optimal policy mix – or the adoption decision for mitigation and adaptation – is determined by two key parameters: an adjusted mitigation/adaptation cost ratio and the climate change damage elasticity. The latter depends crucially on the non-linearity (suddenness) of climate change. Country heterogeneity influences the policy choice strongly in favour of adaptation.

Keywords: climate change, optimal control theory

JEL Classification: Q54