Asset management of public facilities in an era of climate change: application of the dynamic computable general equilibrium model

Abstract

Agricultural production depends heavily on climate conditions; therefore, climatic uncertainty caused by global warming represents a significant threat not only to agriculture but also to entire economies. Furthermore, the drastic budget cuts after 2001 in Japan have reduced public capital stock and have placed the production capacities of various industries in jeopardy. This highlights the need for asset management to prolong the structural integrity of facilities. The present study uses the recursive dynamic computable general equilibrium (CGE) model to evaluate asset management measures (namely, those focusing on reinforcing old facilities) in the context of climatic uncertainty. Simulation results showed that the uncertainty of production induced by climate change is amplified through the market mechanism. The variation in the total production was much wider than the variation in agricultural production originally affected by the climate change. The public capital stock maintained by the asset management measures can ease such uncertainty. Therefore, asset management policy, which makes the deficit minimal leeway for increasing public investment, is critical in Japan. The dynamic CGE model can also measure such long-term comprehensive effects and is useful for policy analysis.