Climate Change Impacts and Market Driven Adaptation: the Costs of Inaction Including Market Rigidities

Abstract

This paper presents a first exercise comparing the cost of climate change stemming from integrated assessment models using reduced-form climate change damage functions with that performed by a CGE model. Furthermore, it investigates the role of market driven adaptation, which CGE models explicitly capture through their endogenous price setting mechanism, in determining these estimates. It is shown that world GDP losses computed by the CGE model are not significantly different from that used by some well-established hard-linked integrated assessment models when they consider the same impact categories. Specifically, the major driver of impacts is the modelling of catastrophic outcomes. Then, rigidities in market adjustments, differently said, in market-driven adaptation, are introduced. This is done restricting the elasticity of input substitution in the production function, the substitutability of domestic and imported inputs, and finally sectoral workforce mobility. We demonstrate that notwithstanding these frictions do increase the cost of climate change impacts they do not change substantively neither the qualitative nor the quantitative picture.