Economic Structural Change as an Option for Mitigating the Impacts of Climate Change
Improving the resilience of the economy in the face of uncertain climate change damages involves irreversible investments to scale up new technologies that are less vulnerable to the effects of climate change. The benefit of having such options inc...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/04/26218888/economic-structural-change-option-mitigating-impacts-climate-change http://hdl.handle.net/10986/24211 |
| Summary: | Improving the resilience of the economy
in the face of uncertain climate change damages involves
irreversible investments to scale up new technologies that
are less vulnerable to the effects of climate change. The
benefit of having such options includes the avoided welfare
cost of diverting consumption to scaling up the new
technology after production possibilities have been
diminished by climate change impacts. This needs to be
balanced against the upfront cost of scaling up a technology
that is potentially less productive than incumbent
technologies. The paper uses a real options approach to
investigate this trade-off, based on numerical simulation of
a multi-period model of economic growth and climate change
impacts that includes a one-time cost associated with
scaling up the alternative technology. The value of the
option provided by investment in the more resilient
technology depends on the ex-ante volatility of climate
change damages, as well as how rapidly climate change
degrades the productivity of the economy's established
technology. In addition, the size of scale-up cost that
leaves the economy indifferent between investing and not
investing in the new technology can be used to define the
value of early investment in the less climate
change–vulnerable technology as a sort of call option. |
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