Improving Climate Damage Estimates by Accounting for Adaptation

Abstract

Climate change is projected to severely damage the global economy. Adaptation in response to the changing climate will affect how much damage ultimately occurs. An important source of uncertainty in existing damage estimates is the extent to which they include or exclude such adaptation. This paper shows how to identify damages by estimating economic responses to climate shocks while controlling for weather forecasts. The resulting empirical strategy also provides estimates of the benefits from forward-looking adaptation. The strategy is applied to study damages from climate shocks and adaptation benefits using detailed, firm-level data on commercial fishing and a novel dataset of climate forecasts. Without accounting for adaptation, direct damage estimates are substantially biased. Adaptation also yields large benefits, with forecasts allowing firms to time entry into the fishery to best avoid adverse conditions.

Keywords: climate change, adaptation, forecasts, expectations

JEL Classification: D22, D84, Q22, Q54