The Strategic Relevance of Adaptation in International Climate Change Policy

Abstract

Policymakers concerned with climate change face a complex risk management problem. The final objective of climate risk management is to avert climate-induced loss of livelihood and economic damage. This can be achieved by two major strategies: first, mitigation, aimed at reducing the probability of climate damage; second, adaptation, aimed at reducing the severity of climate damage. It is recognized that the most appropriate means to combat climate change is a portfolio of adaptation and mitigation policies; it is, however, often overlooked that the optimal composition of this portfolio not only depends on immediate costs and benefits, but also on the strategic interdependencies between mitigation and adaptation. This dissertation analyses the strategic relevance of adaptation in international climate policy. Its key finding is that the possibility to adapt to climate change aggravates the social dilemma associated with reducing greenhouse gas emissions. The first part proposes a game-theoretic model of the climate risk management problem. The model is set up in general terms with mitigation and adaptation levels as individual decision variables. The particular structure of expected utilities under climate risk is made explicit by applying an endogenous probability distribution over different states of nature. Adaptation lowers the individual damage suffered if an extreme weather event occurs. Aggregate mitigation lowers the probability of an extreme weather event. The possibility to adapt causes two opposite effects: adaptation can serve as a partial substitute for mitigation, which has a positive direct welfare effect, provided that adaptation is individually more profitable than mitigation. This same substitution, however, lowers the aggregate level of mutually beneficial mitigation, which has a negative strategic effect. The strategic effect tends to outweigh the direct effect if the number of countries involved is large, if the damage from climate change is large, and if the relative costs of adaptation are high. The second part describes an experimental test of the strategic impact of adaptation on climate risk management decisions and on the resulting expected payoffs. The design is a simplified version of the generic model presented in the first part. The experiment is set up as a non-cooperative, symmetric, one-shot game with homogeneous players. Six treatments were played to independently set three treatment variables: (i) possibility to adapt (yes/no), (ii) unit cost of adaptation (low/high), and (iii) group size (small/large). The results yield qualitative support for the hypotheses derived from the theoretical model: adaptation decreases and mitigation increases as adaptation costs increase. Payoffs behave non-monotonically: they are lower for medium high adaptation cost than for low adaptation cost, but higher for prohibitively high adaptation cost than for medium high adaptation cost. The direct effect of substitution outweighs the strategic effect for smaller groups, and the strategic effect outweighs the direct effect for larger groups. The third part describes an experimental test of the implications of adaptation cost heterogeneity for investment decisions regarding mitigation and adaptation. A particular focus is set on interpersonal differences in expected payoffs. As in the second part, the experiment is designed as a non-cooperative one-shot game, based upon the theoretical model presented in the first part; however, this experiment features heterogeneous adaptation cost. We define three cost types differing in their unit cost of adaptation. Subjects are assigned to cost types and split into groups of four according to nine treatments covering different group compositions. Subjects respond to their co-players’ cost type as predicted by the model: mitigation decreases as the co-players’ adaptation cost increase, adaptation remains unchanged, and the average expected payoff increases. Within heterogeneous groups, the higher-cost type contributes a bigger share to the aggregate mitigation level than the lower-cost type. Beyond these confirmative results, we observe some quantitative deviations from the model predictions. In the heterogeneous games, the type-specific proportional shares of group aggregate mitigation are less divergent than predicted, which leads to more equitable payoffs, but also entails an efficiency loss. We attribute this behavior to inequity aversion.