Climate Change Adaptation and Compensation

Abstract

This chapter focuses on one particular aspect of adaptation to climate change, being the fact that climate change can create large losses. The paper addresses the question how compensation for those losses can be generated. After sketching a few general principles the paper addresses the pros and cons of different compensation mechanisms, in turn the role of liability rules, first party insurance, a compensation fund, direct compensation by government and reinsurance by government are discussed. The paper argues that the desirability of adequate compensation for climate change related damage cannot be ignored, given the potentially catastrophic nature of climate change related damage. The paper argues strongly in favour of an optimal use of first party insurance, eventually in combination with an intervention of government as reinsurer of last resort (in order to deal with catastrophic losses). The paper argues against direct compensation by government since that may create negative incentives for prevention.