FEEM-IEFE Joint Seminar on “Climate Change Impacts And Market Driven Adaptation”
In this paper, the authors address one specific criticism that can be raised against the economic climate change impact assessments conducted with CGE models: that of overly optimistic assumptions on the ability of markets to react to climate change induced shocks, i.e. market driven adaptation. The researchers performed two runs: one with a standard climate change impact assessment exercise using a recursive-dynamic CGE model, while during the second one they restrict the elasticity of input substitution in the production function, the substitution of domestic and imported inputs, and finally sectoral workforce mobility. They demonstrate that these frictions increase the cost of climate change and derive a whole set of methodological recommendations.