Climate change impacts and market driven adaptation: The costs of inaction including market rigidities

In this paper we present a simple impact assessment exercise conducted with a CGE model with two purposes. Firstly, we address a specific criticism raised against IAMs: that of “overly optimistic” representation of adaptation processes that brings, as a consequence, the implicit conclusion of a tendency to underestimate climate change damages. We show that introducing rigidities in adaptation processes the general results of the economic damage assessment performed do change, but not substantively. We conclude that although a more difficult adaptation increases as expected the damages (in our specific case, globally by 20%, but at high temperature levels), this is not sufficient to drastically change the overall picture. On the one hand this highlights robustness of the results obtained with respect to adaptation processes. On the other hand, it shows that the autonomous market adaptation mechanisms embedded in CGE models explain only marginally low climate change costs. These are in fact due to omission of other impacts because of their proven difficulty to be modelled, such as: extreme events, damages due to ecosystem services’ losses, as well as major disruptions due to the existence of tipping points. Secondly, we also verify whether the assessments performed with CGE models produce lower climate-change cost estimates than IA models using reduced-form climate change damage functions. We show that, in fact, when the same impact categories are considered across the two methodologies, damage estimates do not differ significantly at the global level.