The economics of climate change adaptation 

The January analysis asserts that "analysing the behaviour of people as a consequence of climate change" can help policymakers, highlighting the challenge posed by the faster and more vigorous structural changes required to respond to the phenomenon. 

"Recognition of the fact that adaptation [to climate change] may reduce the costs of [its] impacts substantially" has led economists to "address the potential benefits of adaptation options," but nevertheless "very little is known about the economic potential for adaptation strategies or the economic costs of adaptation options," write the authors. 

The CEPS analysis distinguishes between autonomous adaptation to climate change and the public policy dimension. Understanding "what economic agents do autonomously to adapt to climate change" allows us "to identify cases where a public policy strategy for adaptation may be required," the authors argue. 

Autonomous adaptation describes "changes that economic agents make when confronted with climate change," explain Aaheim and Aasen, relating to "shifts in the […] input needed to produce the same output". They cite the need to use more fertiliser to produce the same amount of crop per unit of land as before climate change as an example of this. 

Another autonomous effect is the response of the market to climate change-related shifts in supply and demand, affecting "the relative prices of all goods and services". 

Public policy adaptation is also necessary as "the full potential for adaptation to climate change will not be utilised by the markets alone". This is because individuals "lack incentives to invest in a public good" if they only receive part of the benefit, meaning a "socially beneficial" level of adaptation will not be achieved. 

Thus in cases where the adaptation measure is a public good, public strategies are essential. This is also because "transaction costs are large" and potential "immobility" issues, whereby factors of production must be physically moved. The authors cite adaptation to natural hazards requiring dikes, land-slide entrenchments, roads and railways and flood protection walls as examples. 

Aaheim and Aasen argue that the final impacts of climate change are moderated by the interaction of economic agents with markets, thus allowing a certain degree of autonomous adaptation. But when market conditions are imperfect – for measures which are a public good with high transaction costs – central authorities need to develop adaptation strategies themselves. 

They conclude that "the design of adaptation strategies should address areas where autonomous adaptation is insufficient" and public intervention is required.