Expectations and Adaptation to Environmental Risks

Abstract

Climate change is projected to severely damage the global economy. Adaptation in response to a changing climate will affect how much damage ultimately occurs. This paper introduces a method for estimating forward-looking adaptation based on differences in responses to forecasts and realizations of weather. The method is applied to estimate climate damages and adaptation in a fishery. The application uses a novel dataset of climate forecasts and detailed, firm-level records. In this setting, most of the effect of climate variation can be controlled through adaptation. Important adaptation mechanisms involve reducing production costs and timing entry into the fishery.

Keywords: climate change, adaptation, forecasts, expectations

JEL Classification: D22, D84, Q22, Q54