Value of adaptation in water protection — Economic impacts of uncertain climate change in the Baltic Sea

Uncertain drivers of pollution hinder long-term planning of management of aquatic ecosystems. This paper presents a framework for adjusting optimal water protection in the long term when the true trend in nutrient loading is unknown to the decision maker but can be gradually learned by monitoring stochastic nutrient loads. The economic impacts of an unknown trend consist of (i) the damage caused by the worsened state of the sea, (ii) the cost of nutrient abatement to counter the development and (iii) the adjustment costs caused by uncertainty and imperfect learning. An integrated assessment model is designed and calibrated for quantitative results pertaining to the uncertain impacts of climate change on nutrient input to the Baltic Sea. Under certainty, the net economic impacts from the currently anticipated climate change are 15.0 billion euros, of which 23% comes from welfare losses caused by aggravated eutrophication and 77% from increased abatement costs. The expected adjustment costs due to uncertain future development range from 90 million euros in the case of adaptive management based on Bayesian learning to as much as 7960 million euros in the case of an extreme variant of inadaptive management based on constant abatement levels. If adaptive management is adopted, there is no need to account for future climate change when planning the current abatement targets.