Adaptation and Environmental Policy. Is Their Coexistence Welfare Improving?

Abstract

We examine how an extreme climate event affects the incentives of regulators to invest in adaptation measures that reduce the impact on firms production costs, and how this investment affects environmental policy and firms incentives to invest in abatement. Different government agencies implement these policies (adaptation and emission fees) and can exhibit symmetric or asymmetric preferences for pollution. We find that investment in adaptation and abatement are substitutes, and more likely climate events decrease firms investment in abatement. We also find that severe climate events can induce a lower investment in adaptation, as climate events can be used as a tool to reduce expected pollution. In addition, we show that symmetric agencies induce a lower investment in adaptation. Finally, we identify the welfare effects of adaptation and environmental policy, evaluating welfare gains/losses from each policy.

Keywords: Adaptation, climate events, Environmental Policy, abatement, welfare gains