Estimating the benefits of adaptation to extreme climate events, focusing on nonmarket damages

This paper provides a first approach on how to evaluate nonmarket damages from extreme climate events in monetary units by applying a Computable General Equilibrium (CGE) approach. We develop a static CGE model, which zooms into one single period of a standard Auerbach-Kotlikoff model. While we observe private and instantaneous adaptation in reaction to price changes, we explicitly model public adaptation funded by taxing either labor or capital. We apply our model to heat waves in Switzerland and are able to show that heat waves affect cohorts' utility in an unadapted economy in substantially different ways. While young and less vulnerable cohorts profit (in welfare terms and because of inheritance) from heat waves, vulnerable but surviving cohorts' welfare decreases substantially. Thus, without adaptation, vulnerable cohorts are worse off and might have even fewer possibilities to invest in private adaptation in the long run. Overall, we show that with adaptation, the negative impact of a 2003-like heat wave on output can be reduced from about −0.5% of GDP to −0.04% of GDP. Additionally, equivalent variation is reduced from about −1% to −0.18%.