How Can Policy Encourage Economically Sensible Climate Adaptation?
AbstractThis paper considers the role of incentive based climate adaptation policies. It uses the early literature on pricing and capacity choices under demand uncertainty to describe how revised price structures for the substitutes for climate services can be treated as anticipatory adaptation. In many situations the policies determining the prices of these services make them difficult to adjust. Thus, excess demand will not be managed through price adjustment. This situation is important because it implies that the rationing rules determining who is served influence both capacity planning and pricing decisions. The lesson drawn from these models is that reform of pricing policy for climate substitutes offers a ready basis for incentive based adaptation policy. The last part of the paper offers some empirical evidence on how the price elasticity of the residential demand for water changes with variations in seasonal precipitation. The findings suggest marked differences between normal and dry conditions for the Phoenix metropolitan area. These results reinforce the need to co-ordinate changes in pricing policy with any capacity planning developed for water supplies as part of anticipatory climate adaptation. Similar relationships may well apply for other substitutes for climatic services.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16100.
Date of creation: Jun 2010
Date of revision:
Publication status: published as V. Kerry Smith. "How Can Policy Encourage Economically Sensible Climate Adaptation?," in Don Fullerton and Catherine Wolfram, editors, "The Design and Implementation of U.S. Climate Policy" University of Chicago Press (2012)
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Other versions of this item:
- V. Kerry Smith, 2011. "How Can Policy Encourage Economically Sensible Climate Adaptation?," NBER Chapters, in: The Design and Implementation of U.S. Climate Policy, pages 229-242 National Bureau of Economic Research, Inc.
- Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-26 (All new papers)
- NEP-ENE-2010-06-26 (Energy Economics)
- NEP-ENV-2010-06-26 (Environmental Economics)
- NEP-REG-2010-06-26 (Regulation)
- NEP-RES-2010-06-26 (Resource Economics)
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