Keywords: climate change, economic adaptation, investment uncertainty, option value, foresight
Climate variability, economic adaptation, and investment timing
Recent models of adaptation to climate change have allowed economic agents perfect foresight about future climatic conditions. We argue that it is time to move beyond assumptions of perfect foresight to consider the impacts of changing climate predictability on adaptation dynamics. An option value investment model is used to illustrate the impact of one significant determinant of predictability – climate variability – on the timing of adaptation. Decreased predictability leads to postponed adaptation and increased pre-adaptation damage costs, indicating that estimates of the damage reductions to be gained through adaptation based on perfect foresight have been excessively optimistic.