Improving Climate Damage Estimates by Accounting for Adaptation

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. A major source of uncertainty in existing damage estimates is the extent to which they include or exclude such adaptation. This paper shows how to estimate damages while accounting for forward-looking adaptation using an empirical strategy that compares responses to forecasts and to realizations of weather. The empirical strategy is applied to study climate damages and adaptation in a fishery using a novel dataset of climate forecasts and detailed, firm-level records. Empirically, the benefit of forward-looking adaptation is large and important, and accounting for adaptation substantially changes the estimated damages from climate variation. Mechanism analysis shows that firms adapt by reducing production costs and timing entry into the fishery.

Keywords: climate change, adaptation, forecasts, expectations

JEL Classification: D22, D84, Q22, Q54