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Seawalls and Stilts: A Quantitative Macro Study of Climate Adaptation

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  • Stephie Fried

Abstract

Can we reduce the damage from climate change by investing in seawalls, stilts, or other forms of adaptation? Focusing on the case of severe storms in the US, I develop a macro heterogeneous-agent model to quantify the interactions between adaptation, federal disaster policy, and climate change. The model departs from the standard climate damage function and incorporates the damage from storms as the realization of idiosyncratic shocks. Using the calibrated model, I infer that adaptation capital comprises approximately 1 of the US capital stock. I find that while the moral hazard effects from disaster aid reduce adaptation in the US economy, federal subsidies for investment in adaptation more than correct for the moral hazard. I introduce climate change into the model as a permanent increase in either or both the severity or probability of storms. Adaptation reduces the damage from this climate change by approximately one-third. Finally, I show that modelling the idiosyncratic risk component of climate damage has quantitatively important implications for adaptation and for the welfare cost of climate change.

Suggested Citation

  • Stephie Fried, 2022. "Seawalls and Stilts: A Quantitative Macro Study of Climate Adaptation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3303-3344.
    • Handle: RePEc:oup:restud:v:89:y:2022:i:6:p:3303-3344.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab099
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    Citations

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    Cited by:

    1. Kendra Marcoux & Katherine R. H. Wagner, 2023. "Fifty Years of U.S. Natural Disaster Insurance Policy," CESifo Working Paper Series 10431, CESifo.
    2. Yasmine van der Straten & Enrico Perotti & Frederick van der Ploeg & Rick van der Ploeg, 2024. "Political Economy of Climate Change Adaptation," CESifo Working Paper Series 10961, CESifo.
    3. Joakim A. Weill, 2023. "Flood Risk Mapping and the Distributional Impacts of Climate Information," Finance and Economics Discussion Series 2023-066, Board of Governors of the Federal Reserve System (U.S.).
    4. Frederick Ploeg, 2023. "Fiscal Costs of Climate Policies: Role of Tax, Political, and Behavioural Distortions," De Economist, Springer, vol. 171(2), pages 119-137, June.
    5. Joakim Weill, 2023. "Flood Risk Mapping and the Distributional Impacts of Climate Information," Working Papers 2023.10, FAERE - French Association of Environmental and Resource Economists.
    6. Harrison Hong & Neng Wang & Jinqiang Yang, 2023. "Mitigating Disaster Risks in the Age of Climate Change," Econometrica, Econometric Society, vol. 91(5), pages 1763-1802, September.
    7. Toan Phan & Felipe Schwartzman, 2023. "Climate Defaults and Financial Adaptation," Working Paper 23-06, Federal Reserve Bank of Richmond.
    8. Ferreira, Susana, 2024. "Extreme Weather Events and Climate Change: Economic Impacts and Adaptation Policies," IZA Discussion Papers 16715, Institute of Labor Economics (IZA).

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