Adaptation to climate change: Extreme events versus gradual changes

Sangjun Lee and Jinhua Zhao

Journal of Economic Dynamics and Control, 2021, vol. 133, issue C

Abstract: Global climate change will lead to increased frequency and severity of extreme weather events, on top of the gradual changes in temperature and precipitation. We develop a real options model of adaptation to climate change, capturing the different effects of gradual changes, represented by a Brownian motion process, and extreme events, represented by Poisson jumps with a hyper-exponential jump size distribution. We compare adaptation decisions under the increased frequency, severity, and tail thickness of extreme events as well as gradual changes. We find that while the adaptation incentives are higher in response to gradual changes, the probability of carrying out adaptation activities is higher in response to extreme events. The catalyst effects of extreme events become more significant when the tail distribution of the extreme events becomes heavier.

Keywords: Adaptation; Extreme events; Gradual changes; Wiener-Hopf factorization (search for similar items in EconPapers)
JEL-codes: C61 D81 Q54 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:133:y:2021:i:c:s0165188921001974

DOI: 10.1016/j.jedc.2021.104262

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