Adapting to Rising Sea Levels: How Short-Term Responses Complement Long-Term Investment

35 Pages Posted: 4 May 2020 Last revised: 8 Jan 2021

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: January 8, 2021

Abstract

This paper presents a parsimonious model of a coastal locality's adaptation to rising sea levels and uses the model to examine cost-minimizing policies involving two complementary approaches. One involves irreversible investment in sea walls and similar infrastructure. The other involves activities, such as beach scraping, that only provide temporary protection. Costs are minimized by delaying investment until the present value of the benefits from avoided inundation costs exceeds upfront investment costs by a margin that is economically significant. The premium, which can exceed 50% of investment costs, is higher when the sea level is rising more quickly. The ability to temporarily boost defenses is used aggressively: spending on temporary improvements immediately before investment is several times larger than its value immediately afterwards. Temporary improvements are made even when the marginal cost of increasing the effectiveness of defenses this way is significantly greater than the equivalent annual cost of permanently increasing effectiveness by investment.

Keywords: climate change; adaptation; cost-benefit analysis; real options analysis

JEL Classification: G31, Q54, R42

Suggested Citation

Guthrie, Graeme, Adapting to Rising Sea Levels: How Short-Term Responses Complement Long-Term Investment (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3571033 or http://dx.doi.org/10.2139/ssrn.3571033

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand

HOME PAGE: http://sites.google.com/view/graemeguthrie

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