Abstract
Emissions control cannot address the consequences of global warming for weather disasters until decades later. We model regional-level mitigation, which reduces aggregate disaster risks to capital stock in the interim. Unexpected disaster arrivals increase belief regarding the adverse consequences of global warming and mitigation spending. Competitive markets underprovide such spending because of externalities. Capital taxes to fund mitigation restores first-best. We calibrate our model for seawalls that protect against Atlantic hurricanes. The optimal annual seawall tax is 1.3% of housing stock value. Welfare is 25% higher and coastal property prices are only 5% lower in the first-best compared to the competitive equilibrium because mitigation reduces aggregate risks. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
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