Growth and Adaptation to Climate Change in the Long Run

As the climate is changing, the global economy is adapting. We provide a novel method of estimating how much adaptation has taken place historically, how much it has cost, and how much it has reduced the impacts of climate change. The method is based on a structurally estimated, globally aggregated model of long-run growth, which identifies how household consumption and fertility preferences, innovation, and land use allow the economy to adapt to climate change. We identify the key role of agriculture, because it is especially vulnerable to climate change and food cannot be perfectly substituted. To compensate for declining crop yields, the world economy has shifted resources into agriculture and this has slowed down structural change. We also use the model to estimate optimal future carbon taxation. Adaptation is costly, so radically reducing future greenhouse gas emissions could improve welfare substantially. Uncertainty about climate damages remains substantial, particularly in agriculture, and this strongly affects optimal policy.