Case Study 4: Macro-economic effects of adaptation

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The primary focus of adaptation economics to date has been bottom-up in nature, working at the sector level. However, it is increasingly clear that climate change – and adaptation to it – could have widespread macro-economic consequences with possible implications for public finances, and that investment in adaptation could affect growth and competitiveness. In addition to the areas above, there is therefore an emerging need for more advanced analysis of the macro-economics of adaptation. One major way to explore these effects is through the use of Computable General Equilibrium (CGE) models which have been increasingly used to investigate the economic implications of climate change.

Current practice

CGE models can capture and describe market adjustments induced by a localised shock onto the global context and the feedback of macroeconomic dynamics on each single market. By construct, the autonomous adaptation is captured by CGE models because they explicitly represent price-driven adjustments in agents' decisions. However these adjustments have never been the object of a systematic investigation to determine: (a) if and how they can really smooth climate change impacts; or (b) which mechanisms play the more prominent role (e.g. the degree of substitutability between goods by consumers, or the technological substitution possibility across primary factors). Furthermore, planned adaptation has been tackled very marginally in current CGE assessments, and existing studies have not contained the necessary detail, or the appropriate framework to consider adaptation costs and benefits. In the very few available examples, planned adaptation has been considered by perturbing national investments, to mimic planned protection activities.


The objective of WP8 is to contribute to better understanding the macro-economic implications of autonomous and planned adaptation for EU countries by improving the functional specification of well-established CGE models: (CAGE-GEME3 and ICES). These models will allow for analysis of the macro-economic implications in terms of GDP, sectoral activity and household welfare from autonomous and planned adaptations.

Description of tasks

The two forms of adaptation, autonomous and planned, will be examined: (a) in their ability to reduce (or amplify) direct climate change impacts, (b) in the higher order costs they can trigger in the economic system by dedicating expenditures and/or investment to the implementation of anticipatory or reactive, sector-specific measures. The first aspect will be accomplished through a systematic analysis of different rigidities that can create sluggishness or inertias in autonomous adjustments to climate change. The second task will be performed through a detailed analysis of the crowding out and re-distributional effects triggered by sector-specific investment in adaptation.


The research of WP8 will produce a first report on the two GGE models used (ICES and CAGE-GEME3) regarding their model benchmark scenario for the subsequent analysis. This benchmark scenario will provide a reference in which there are no planned adaptation measures being evaluated, and will be useful to address the main tasks of the work package.

A second report will present the modeling of autonomous adaptation with CAGE-GEME3, and planned adaptation with ICES, detailing the chosen methodology as well as the main results of both tasks. For the first task, the report will emphasize the main outcomes of imposing restrictions to autonomous adaptation following specific criteria. For the second task, the report will describe the findings of including planned adaptation measures to deal with selected climate change impacts.

A third report will provide policy recommendations, lessons learned as well as guidance that result from the macro-economic simulations, in particular to explore the linkages between mitigation and adaptation policies as currently debated in international climate negotiations. International financial support to adaptation from developed to developing countries will be simulated in addition to domestic adaptation policies along with the effects on donor and beneficiary economies.


D8.1) Report on the ICES and GEM-E3 model benchmark scenario for the subsequent analysis. (Month 24)

D8.2) Modelling autonomous adaptation with GEM-E3 & ICES: methodology and results. (Month 29)

D8.3) Report: Policy recommendations, lessons learned and guidance. (Month 30)