Climate change puts society at risk. It is possible to prevent damages through mitigation and adaptation. Mitigation strategies against the risks of climate include curtailing GHG emissions to lower the likelihood that worse states of nature will occur. Adaptation strategies to climate risk include the changing of production and consumption decisions to reduce the severity of a worse state in the scenario if it does occur (Ehrlich and Becker, 1972; Crocker and Shogren, 1999). A portfolio of mitigation and adaptation actions jointly determines climate risks and the costs of reducing them. Since individuals in their private capacity have the liberty to undertake adaptation to climate change on their own accord, modellers and policymakers need to address these adaptive responses when choosing the optimal degree of public mitigation. If this is not the case, then policy actions are likely to be more expensive than they need be, with no additional reduction in climate risk (see, e.g., Schelling, 1992).

While most people appreciate that actions on adaptation affect the costs of mitigation, this obvious point is often not addressed in climate policymaking. Policy is fragmented–with mitigation being seen as addressing climate change and adaptation seen as a means of reacting to natural hazards. As a consequence, the estimated costs of each can be biased (see Kane and Shogren, 2000). Usually, mitigation and adaptation are modelled separately as a necessary simplification to gain traction on an immense and complex issue. One question that must be addressed is “How reasonable is this assumption?” Another is “What are the likely consequences of this assumption on the estimated costs of mitigation?”

First, separability presupposes that the overall effectiveness and costs of mitigation do not depend on adaptation. However, for this assumption to hold, the implicit presumption is that climate risk is exogenous–a risk beyond people’s private or collective ability to reduce. The necessary economic conditions for this to hold are rather restrictive. In particular, climate risk can be considered as exogenous only if markets are complete. A complete set of markets exists if people can contract to insure against all risks from each conceivable state of nature that might be realized (Marshall, 1976). Complete markets allow for perfect risk spreading and risk pooling such that the only remaining risk is outside the control of human actions (e.g., phases of the moon). However, markets for climate risk are notorious incomplete or non-existent because of the high cost of contracting (Chichilnisky and Heal, 1993). People make private and collective adaptation decisions through the markets that do exist and through collective policy actions. The economic circumstances that influence these choices matter to the level of risk, and addressing these conditions is essential for the successful estimation of costs. People choose to create and reduce risk. How people perceive risk, the relative costs and benefits of alternative risk reduction strategies, and relative wealth affect these choices.

Similar to income and substitution effects, adaptation can have two effects on the costs of mitigation. First, more adaptation can lower mitigation costs because policymakers choose to move to another point on the same mitigation cost curve - adaptation does not alter the marginal productivity of mitigation, it induces a shift along the cost curbe. Second, adaptation acting as a technical substitute or complement shifts the mitigation cost curve. For example, flood defences change land use and thereby change costs and prices in an area, which impacts on mitigation costs. Whether adaptation causes a shift along the mitigation cost curve or a shift of the entire curve itself, or both, then becomes a modelling question, and an empirical one to determine the magnitude of the shift along and to a new cost curve.

Second, sectoral work in agriculture, forestry, and coastal areas shows that cost estimates are sensitive to the inclusion of adaptation (see, e.g., Sohngen and Mendelsohn, 1997; Sohngen et al., 1999). Greater climate variability, for instance, can influence how adaptation affects mitigation in agriculture. Increased levels of risk directly induce a nation to adapt more by switching its crop mix and crop varieties to those more tolerant of drier or wetter conditions, and by modifying its weed control strategies. The magnitude of this adaptation depends on how risk affects the perceived marginal productivity of mitigation (e.g., more or less effective soil sequestration per unit of area), and how mitigation and adaptation work with or against each other. Bouzaher et al. (1995), for example, estimate that winter cover crops can be used to increase soil organic carbon by expanding annual biomass production. They also show that conservation tillage, the Conservation Reserve Program, and the Wetlands Reserve Program can increase soil carbon by minimizing soil disturbance and targetting bottomland for hardwood trees. For non-climate risk, models that account for mitigation and adaptation risk estimate that benefits are underestimated by 50% when adaptation is ignored (e.g., Swallow, 1996).

Third, uncertainty in cost is affected by interaction of the technologies for risk reduction–mitigation and adaptation. By mitigation, humans reduce the odds that a deleterious event happens; by adaptation, they reduce the consequences when a damaging event actually does occur. For the most part, climate change literature contains models that deal with mitigation and adaptation separately. This is unfortunate, since significant interactions are likely to exist between how people choose to mitigate and adapt (Shogren and Crocker, 1999). These risk-reduction strategies probably complement or negate each other. Understanding the interaction between the two can help formulate better the analysis of mitigation costs. The benefits of mitigation will be lower if more people can adapt to the climate.

These results suggest that more it would be worthwhile to pay more attention to the interaction of mitigation and adaptation, and its empirical ramification. The challenge is to capture in a reasonable way the linkages between these sets of actions, and to establish how this interaction can impact the estimated costs of climate protection. Even if a complete empirical application of the portfolio of risk avoidance is currently unreachable, an understanding of which unmeasured links might be most valuable to decision makers in the future could indicate whether the costs of mitigation are being underestimated.

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