Adaptation and Mitigation in Long-term Climate Policy

The paper analytically explores the optimal allocation of investments into mitigation and environmental adaptation against climate change damages at a macroeconomic level. The economic-environmental model is formulated as a social planner problem where adaptation and abatement investments are separate decision variables. The existence of a unique steady state is proven. A comparative static analysis of optimal investments leads to essential implications for associated long-term environmental policies. It is shown that the optimal policy mix between adaptation and mitigation is lower for countries with higher economic efficiency for all applicable parameter ranges. Data calibration and numerical simulations are provided to estimate practical validity of theoretical outcomes.