Mitigating Disaster Risks in the Age of Climate Change

71 Pages Posted: 13 May 2020 Last revised: 25 Feb 2022

See all articles by Harrison G. Hong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Jinqiang Yang

Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2022

Abstract

Emissions control cannot address the consequences of global warming for weather disasters until decades later. We model regional-level mitigation or adaptation, which reduces disaster risks to capital in the interim. Mitigation depends on belief regarding the adverse consequences of global warming. Pessimism jumps with a disaster and slowly reverts in the absence of arrivals. Mitigation spending by firms is less than first-best because of externalities. We prove that capital taxes to fund public mitigation, which requires collective action, restores first-best. We apply our model to country-level mitigation of major tropical cyclones, using GDP growth damages, government flood-control budgets, and climate-model projections of increasing cyclone frequency. For a typical country exposed to cyclones, a disaster arrival not only damages its capital stock, but elevates perceived risks, and as a result has persistent effects on the willingness to pay for mitigation, taxes, the mix of private and public mitigation, Tobin's q, and growth.

Keywords: Weather Disasters, Growth, Learning, Mitigation, Market Failure, Climate Change

JEL Classification: H56, G01, E20

Suggested Citation

Hong, Harrison G. and Wang, Neng and Yang, Jinqiang, Mitigating Disaster Risks in the Age of Climate Change (February 24, 2022). Available at SSRN: https://ssrn.com/abstract=3572457 or http://dx.doi.org/10.2139/ssrn.3572457

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Jinqiang Yang

Shanghai University of Finance and Economics ( email )

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China

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