Growth and adaptation to climate change in the long run

As the climate is changing, the global economy is adapting. This paper provides a novel method of estimating how much adaptation has taken place historically, how much it has cost, and how much it has reduced the impacts of climate change. The method is based on a model of long-run growth that identifies how household consumption and fertility preferences, innovation and land use enable the economy to adapt to climate change. The authors identify agriculture as playing a key role, because it is especially vulnerable to climate change and food cannot be perfectly substituted. To compensate for declining crop yields associated with climate change, the world economy has shifted resources out of other sectors and into agriculture. This has amplified loss of output in the rest of the economy and slowed down the process of structural change away from agriculture towards manufacturing and services. The authors also use the model to estimate optimal future carbon taxation. Adaptation is costly, so radically reducing future greenhouse gas emissions, including through taxing emissions at a high rate, could improve social welfare substantially.