Daxuan Zhao and I have just released a new NBER Working paper on climate change adaptation. Recall that climate change mitigation focuses on slowing down and even reducing our production of greenhouse gas emissions. Adaptation refers to how an economy's growth and individual well being is affected by the stock pollutant externality.
Many “climate warriors” such as Joe Romm rail against climate skeptics because such individuals vote against carbon taxes. Our paper has nothing to say about this topic because there is no government in our paper. Instead, we study how an economy's ability to adapt to climate change is affected by the presence of skeptics. Our paper builds on Acemoglu and Linn (2004) , Ehrlich and Becker (1972) and it generates a new Lucas Critique!
A climate skeptic is a person who does not believe that the world is warming. To appreciate the logic of our paper, suppose that everyone in the world but you is a climate skeptic. In such a world, you know that the world is warming but nobody else agrees with you. In this world, no innovative firm will devote any effort to induced innovation targeted towards adaptation friendly products such as air conditioners or stilts for sea level homes because there is no demand. Innovative firms face a fixed cost F for innovating and if there isn't sufficient demand then they won't bear these costs. So, in this case you (the lone rational expectations person) suffer from being surrounded by skeptics.
In the second part of the paper, we introduce a second margin for adaptation. We introduce spatial sectors such that there are two cities. One city is cool (think of San Francisco) while the other city is hot and getting hotter because of climate change. Since the skeptics don't believe that the hot city is becoming hotter, they don't mind living in the hot city while the rational agents all move to the cooler city and (this is the key point; ) they don't pay a rental price premium for the cool city because the skeptics aren't aware that the world is warming. In this case, the rational agents gain a rent discount in the adaptation friendly city because there are skeptics who set the market price (because they are the marginal agents).
We then explore the interaction between migration and innovation as strategies for adaptation. At the end of the paper, we discuss how skeptics hold an option to buy future adaptation friendly products that have been induced because of the rational agent demand.
Our paper opens up several new lines of research for you to ponder. For example, Dr. Romm often blogs about the climate change challenge. Is he “preaching to the converted”? Do any skeptics read his blog? Has his urgent writings every changed anyone's minds about the climate change challenge so that a skeptic now worries about the issue? In the language of economics, is anyone “at the margin” so that new information leads them to update their beliefs? Our paper takes the two groups of “believers and skeptics” as given but what role does the media play in shifting the proportions of these two groups?
Our paper shows the real effects of such “conversions”.