Mitigating Disaster Risks in the Age of Climate Change

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 stock in the interim. Disaster arrivals increase belief regarding the adverse consequences of global warming and mitigation spending. Competitive markets underprovide such spending because of externalities. Capital taxes to fund mitigation restores first-best. We apply our model to country-level mitigation of GDP growth damages from tropical cyclones using flood controls. We calibrate it based on historical damage distributions and climate model projections of more frequent major cyclones from global warming. One major cyclone arrival significantly increases pessimistic beliefs, leading to higher taxes, lower Tobin's q, and reduced growth.

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

JEL Classification: H56, G01, E20