Optimal adaptation policies under a carbon budget constraint

Abstract

We develop a dynamic model of energy use that relies on three primary sources: a ‘dirty’ fossil resource, a ‘clean’ fossil resource equipped with a specific abatement device, and a carbon-free renewable energy source. The total amount of carbon emissions is limited by a given carbon budget. Expenditures on adaptation measures can expand this budget by increasing society’s tolerance to the effects of climate change. Therefore, we make the carbon budget endogenous and dependent on the adaptation effort. Within this framework, we study the trade-offs between mitigation (achieved through energy substitutions and abatement) and adaptation to relax the climate constraint imposed by the carbon budget. We find that, without any abatement option, adaptation measures are only taken once carbon concentrations reach a minimum tolerance level for society. On the other hand, when abatement is possible, the economy should start implementing it as soon as it begins adapting. Over time, both abatement and adaptation efforts will increase until the economy reaches a point where it prefers to fully abate carbon emissions rather than investing further in adaptation. We refer to this point as the maximum adaptation frontier.