Exploring market-driven adaptation to climate change in a general equilibrium global trade model

Climate change will have a big impact on human societies and economies. However, huge uncertainty remains concerning the role of adaptation in absorbing the negative effects. Our aim is to investigate how autonomous adaptation, and specifically the interaction between the different dimensions of market-driven adaptation, may influence economic performance in the context of the global warming. These different dimensions refer to the degree of mobility of capital, labour and goods in the global markets, and the substitutability between production factors. To achieve our goal we use a neo-classical Computable General Equilibrium (CGE) trade model. Climate impacts are derived from existing empirical literature on heat stress, agricultural productivity and sea level rise, and are translated in the economic model as exogenous shocks on the stock and productivity of production factors. Results show that Tropical and sub-Tropical regions are more negatively affected by climate change compared to the regions in the North, and the international mobility of labour and capital amplifies the economic inequalities between North and South in terms of GDP and production factor distribution. However, the international mobility of labour and capital is important to relocate production factors in the most productive regions of the planet but a necessary condition for such relocation is a free global market for goods. We also note a positive interaction between production factor substitutability and free markets. One possible policy implication of this study may be considering free global markets for both goods and factors such as a useful option for climate change adaptation and implementing at the same time appropriate development policies in the most vulnerable regions to reduce the economic disparities between North and South.