Optimal Climate Change Adaptation and Mitigation Expenditures in Environmentally Small Economies

Abstract

We study the optimal role of mitigation and adaptation strategies for environmentally small economies, that is, economies that are witnessing an exogenous increase in emissions to which they are contributing very little. Our results lead to three main conclusions. First, small economies should concentrate their environmental efforts, if any, on adaptation. This is a recommendation based on cost effectiveness rather than on any idea about these economies indulging in free riding. Second, environmentally small economies that are unable to spend enough on adaptation may end up spending less on mitigation in the long term, owing to their impoverishment as a result of negative climate shocks. Third, higher mitigation expenditures may arise not only as a result of greater optimal adaptation expenditures, but also because of increased adaptation to the incentives for mitigation provided by richer countries. For the simulations, we use a calibrated optimal growth model for Brazil, Chile, and the United States. JEL classifications: Q52, Q54