CLIMATE CHANGE ADAPTATION COSTS AND PROSPECTS IN THE DEVELOPED WORLD : INCORPORATING CLIMATE CHANGE INTO LONG TERM POLICIES

At higher temperatures, the climate change costs of adaptation will rise sharply and the residual damages will remain large. The additional costs of making new infrastructure and buildings resilient to climate change in Organisation For Economic Cooperation And Development (OECD)Organization For Economic And OECD countries could range from $15 – 150 billion each year (0.05 – 0.5% of GDP), with higher costs reflecting the prospect of higher temperatures in future.

In the developed world, some sectors may experience benefits from climate change for moderate levels of warming up to 2 – 3°C, particularly in higher latitude regions. Here, adaptation may allow developed countries to enhance such benefits. Farmers could switch to crops more suitable for warmer climates, such as grapes for wine and some regions may be able to develop their summer tourism industries, as traditional tourist areas in the Mediterranean, for example, suffer from extreme heat and increasing water shortages. But the negative impacts will become increasingly serious with rising temperatures and a rising risk of abrupt and large-scale changes. Growing water shortages in regions with already dry Mediterranean-like climate (Southern Europe, California, Australia) will also require costly investment in reservoirs and other measures to manage water stress and shortages. The United Kingdom(UK) Environment Agency has estimated that 10 – 15% of increased reservoir capacity may be required to address potential water deficits could cost the United Kingdom $5.5 billion (£3 billion).

Infrastructure is particularly vulnerable to heavier floods and storms, in part because OECD economies invest around 20% of GDP or roughly $5.5 trillion in fixed capital each year, of which just over one-quarter typically goes into construction ($1.5 trillion – mostly for infrastructure and buildings). The additional costs of adapting this investment to a higher-risk future could be $15 – 150 billion each year (0.05 – 0.5% of GDP), with one-third of the costs borne by the US and one-fifth in Japan. This preliminary cost calculation assumes that adaptation requires extra investment of 1 – 10% to limit future damages from climate change. For temperature rises of 3 or 4°C, these calculations are likely to scale as a constant proportion of GDP as GDP grows. But the costs will rise sharply if temperatures increase further to 5 or 6°C, as expected if emissions continue to grow and feedbacks amplify the initial warming effect.

Stronger flood defences to protect infrastructure from storm surge damage will form a significant part of the extra spending. In the United Kingdom, the Foresight study estimated that a cumulative increase in investment of $18 – 56 million (£10 – 30 million) each and every year for the next 80 years would be required to prevent the costs of flood damages escalating in the United Kingdom. Defending New Orleans alone from flooding during a Category-5 hurricane is expected to cost around $32 billion.

Developed countries typically have well-established markets with individuals and firms modifying their behaviour in response to price signals. Markets that respond to changing climate risks will stimulate adaptation in the private sector. Climate change Adaptation is likely to be most responsive to market signals in sectors dominated by traded goods, such as agriculture, timber and energy. Government action may be required to set up more effective pricing mechanisms to encourage more efficient use of goods such as water where property rights are often poorly defined.

Insurance provides another important mechanism through which market signals can drive adaptation. Insurance has a long history of driving risk management through pricing risk, providing incentives to reduce risk, and imposing risk-related terms on policies. By accurately measuring and pricing today’s climate risks, insurance can help incentivise the first steps towards adaptation. The extra cost of insurance can act as a disincentive to build on high flood risk areas. Market signals of this kind encourage individuals or firms to reduce their present-day risk to weather damage, because of the cost saving associated with taking steps to manage climate risks. Encouraging action that improves society’s resilience to current climate today should improve robustness to climate change in the future. Over time additional adaptation may be required to deal with longer-term effects of climate change.

Market forces alone, however, are unlikely to deliver the full response required to deal with the challenge of climate change. This does not mean that government should manage each individual response to climate change. Rather governments should put in place a set of policies that provide individuals and firms with better information and the appropriate regulatory framework to help markets stimulate adaptation.

Many developed countries have conducted detailed studies on projected climate change impacts and vulnerability in key sectors, but only a handful of governments are moving towards implementing climate change adaptation initiatives. Some governments are beginning to create policy frameworks for climate change adaptation. But even in the countries where awareness on climate change adaptation are relatively high, practical measures to prepare for climate change are limited and remain largely confined to the public sector. Government’s own long-term polices for climate-sensitive public goods, such as natural resources protection, coastal protection, and emergency preparedness, should take account of climate change to control future costs. As well as providing a clear policy framework for investment decisions, government sets long-term policies for public and publicly provided goods that supply community services. Examples of specific relevance to climate change include: flood and coastal protection; public health and safety; and natural resource protection. The risks of not taking action could leave a significant public liability – either because the private sector will no longer carry the risk, for example by refusing to offer flood insurance, or because of sharply rising costs of disaster recovery and public safety. However, climate change adaptation policies will require careful cost-effectiveness analysis before implementation to prevent any wasteful expenditure on remote risks and inadequate expenditure on present-day risks.

Protecting natural systems could prove particularly challenging. The impacts of climate change on species and biodiversity are expected to be harmful for most levels of warming, because of the limited ability of plants and animals to migrate fast enough to new areas with suitable climate. In addition, the effects of urbanisation, barriers to migration paths, and fragmentation of the landscape also severely limit species’ ability to move. For those species that can move rapidly in line with the changing climate, finding new food and suitable living conditions could prove challenging. Climate change will require nature conservation efforts to extend out from the current approach of fixed protected areas. Conservation efforts will increasingly be required to operate at the landscape scale with larger contiguous tracts of land that can better accommodate species movement. Policies for nature protection should be sufficiently flexible to allow for species’ movement across the landscape, through a variety of measures to reduce the fragmentation of the landscape and make the intervening countryside more permeable to wildlife, for example use of wildlife corridors or “biodiversity islands”.

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