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How Can Policy Encourage Economically Sensible Climate Adaptation?

In: The Design and Implementation of U.S. Climate Policy

  • V. Kerry Smith

This 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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This chapter was published in:
  • Don Fullerton & Catherine Wolfram, 2012. "The Design and Implementation of U.S. Climate Policy," NBER Books, National Bureau of Economic Research, Inc, number full10-1, 07.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12160.
    Handle: RePEc:nbr:nberch:12160
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Howe Charles W. & Smith Mark Griffin & Bennett Lynne & Brendecke Charles M. & Flack J. Ernest & Hamm Robert M. & Mann Roger & Rozaklis Lee & Wunderlich Karl, 1994. "The Value of Water Supply Reliability in Urban Water Systems," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 19-30, January.
    2. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    3. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2009. "The Environment and Directed Technical Change," NBER Working Papers 15451, National Bureau of Economic Research, Inc.
    4. Fankhauser, Samuel & Smith, Joel B. & Tol, Richard S. J., 1999. "Weathering climate change: some simple rules to guide adaptation decisions," Ecological Economics, Elsevier, vol. 30(1), pages 67-78, July.
    5. Carlton, Dennis W, 1977. "Peak Load Pricing with Stochastic Demand," American Economic Review, American Economic Association, vol. 67(5), pages 1006-10, December.
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