Sea Level Rise and Optimal Flood Protection under Uncertainty

Taco Prins, Frederick van der Ploeg and Ton S. van den Bremer
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Taco Prins: University of Amsterdam
Frederick van der Ploeg: University of Amsterdam and Tinbergen Institute
Ton S. van den Bremer: University of Amsterdam and Tinbergen Institute

No 25-030/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We analyse optimal investment in one of the most important forms of climate adaptation: flood protection. Investments to build and heighten dykes and surge barriers involve considerable adjustment costs, so that their construction locks in the level of flood protection for some time. Investment decisions must take into account both economic and sea level rise uncertainty over a horizon of several decades, where the latter is to a large extent driven by global warming. We put forward a tractable macro-finance DSGE model that includes flood risk. We obtain solutions for optimal flood protection as a function of these uncertainties, costs, and preferences regarding impatience, risk aversion and intertemporal substitution. Sea level rise uncertainty always leads to more flood protection. Economic uncertainty leads to less (more) protection if the elasticity of substitution is greater (less) than one. We illustrate our results with a calibrated case study for the Netherlands.

Keywords: Sea level rise; flood risk; macroeconomic risk; climate adaptation; discounting; risk aversion; intertemporal substitution (search for similar items in EconPapers)
JEL-codes: F64 Q51 Q54 (search for similar items in EconPapers)
Date: 2025-04-25
New Economics Papers: this item is included in nep-dge, nep-res and nep-upt
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