Seaport adaptation to climate change disasters: Subsidy policy vs. adaptation sharing under minimum requirement

Abstract

Many seaports around the world face serious threat of natural disasters related to climate change. They have been investing in adaptation measures to mitigate potential disaster damages. This paper proposes an economic model to examine the inter-port competition in adaptation investments when ports face asymmetric disaster losses. Specifically, we model the trading mechanism of the adaptation resources among different ports, and benchmark the outcomes with the widely used adaptation subsidy policies. Our analytical results suggest that with adaptation trading under the minimum requirement policy, the port facing the low disaster loss sells adaptation resources to the port facing the high disaster loss, allowing the latter to cover all its disaster loss. Subsidy policy is pro-competitive and intensifies inter-port competition in adaptation investment and output. In comparison, adaptation trading facilitates inter-port coordination, possibly leading to port collusion. When the magnitudes of disaster damages are low, adaptation trading brings higher social welfare than the subsidy policy despite possible port collusion, leading to a Pareto improvement. When the magnitudes of disaster damages are high, the subsidy policy is preferred in terms of social welfare and port adaptation. Our model results reveal the strengths of alternative adaptation policies, and call for evaluation beyond competition effects when examining port coordination in adaptation.