 Okay so this presentation is rather different to the other two we're gonna back at art and sort of take a much more macro-scale view of the problem it also doesn't have a whole lot to do with aid it's really about how developing countries should allocate resources within themselves to appropriately address the climate change problem from a perspective of adaptation so it's about resource allocation and optimal investment so some stylized facts to start developing countries are highly vulnerable to climate change in particular in Southeast Asia and South Africa this is a picture from the IPCC of projected changes in temperature and precipitation of the last two decades of this century versus the last two decades of the last century you can see especially in the sort of southern area of Africa there's a very strong heating and drying trend as predicted and so there's a strong incentive to get some kind of insurance or protection against the the deleterious impacts of climate change in these areas so what is this paper going to do well we're going to ask about what the best thing that developing countries should be doing to address this problem is and there are essentially two views that you can find in the grey literature and in the economics literature as to investment to protect them to for invent developing countries to protect themselves and the first view is a view that's sort of widely associated with the great economist Tom Schelling which is to say that the best thing that developing countries can do is their own continued development that is forget entirely about the problem of specific adaptations to climate change specific protection and simply grow simply develop and gain all the sort of concomitant benefits of development that is reduced disease burdens greater financial resources more robust institutions a wealth wealthier populace all of these things have strong protective elements with respect to the deleterious effects of climate change because your economy becomes more robust more diversified out your economy becomes less sensitive on climate-dependent sectors such as rain-fed agriculture and in general there's a very strong relationship between development and lack of vulnerability or adaptive capacity is somewhat safe that so this is a view often so the review that developing countries should just develop is associated with Schelling also Rob Mendelssohn at Yale has pushed this view forward then there's a separate view which is Nick Stern has started and you can find it very strongly in the publication of the World Bank which is that development is contingent on adaptation that is if you don't do specific investment in infrastructure and climate-proofing designed to account for the additional damages that climate change is going to bring to bear on these economies then the whole process of development is compromised then development itself is in jeopardy in jeopardy and you will simply lose a lot of growth that you would have had had you protected yourself against the climate problem so what this paper is going to try and do is provide a very broad stylized approach at the macro level for adjudicating between these two positions so the idea here is to construct a very simple model that represents the adaptation problem as an investment problem so where you have a choice between investing in adaptation specifically designed to reduce the damages from climate change and investment simply in normal development and development in productive capital and we're going to see we're going to try and choose those develop those investment policies optimally and see what the correct balance might be under some sort of suggestive scenarios we're going to apply the model empirically to sub-saharan Africa and use extensive sensitive analysis to see what the what the conclusions depend on which parameters in the model the conclusions depend on and the sort of broad finding if you take one message away is that in most contingencies it's actually optimal to grow the stock of adaptive capital very rapidly over the next 50 years and we're going to show you sort of how that comes out of the model and how you can break that conclusion so for those of you who care about the details so the model setup is something called a Ramsey Cascoopman's growth model it's a very standard growth model in economics it's been widely widely used in the mitigation literature so North House's dice model is based on exactly the same structure we modified a bit to account for adaptation and what's novel in the model is that we treat adaptation as a stock variable that is it's something that accumulates over time and the total sum of accumulated adaptive investment is what provides you with protection so we're talking about stocks of infrastructure stocks of retrofitting of buildings etc that all provide a specific protection against climate change that is to say these the adaptive capital is completely unproductive in the absence of climate change but with climate change it reduces damages from temperature for temperatures a proxy for climate change so we have two stocks in the model vulnerable capital which is just normal development capital it's normal capital that produces output that the economy can use to grow and adaptive capital which as I said is only productive in the app and is unproductive in the absence of climate change and only productive when there's climate change and produce and reduces damages and there are two controls so controls are the decision variables that the planners of the economy or the private sector and a market equilibrium chooses and these are investment in vulnerable capital and investment in adaptive capital and those you can sort of change one of those into consumption so consumption is just how much how many goods and services the economy is consuming and we can assume that we have a small region of the world and by small I mean small in terms of emissions so so sub Saharan Africa for example has a very small contribution to global emissions so it's not at all about approximation to take temperature change as exogenous that is independent of the actions of this region so the region simply simply takes a temperature trajectory and responds to it because it doesn't feel that it can manipulate that trajectory endogenously so this would not be an appropriate assumption for something like China which accounts for I think 22% of global emissions but it's certainly a very good assumption for sub Saharan Africa and what we're going to do to sort of put a break on how effective adaptation is we're going to put in something called a convex cost function for how much it costs you to do a given amount of adaptation investment and what that does basically is it makes it more expensive to adapt quickly and that the parameters that function capture the sort of the the barriers to acting quickly to address climate change so these are things like planning costs policy delays and corruption so a little bit of math don't be put off by it so the social plan is going to maximize a standard utilitarian objective function so you cares about the utility of his country throughout time and we have two stocks vulnerable capital and adaptive capital so this is the rates of growth of the vulnerable of the vulnerable capital stocks so remember vulnerable capital is just normal investment and it's comes from a variety of factors so there's just normal GDP so the capital stock is translated into economic output though that economic output is damaged by climate change so X here is the temperature variable and it's changing over time we've got a whole series of scenarios in the model and the capital stock the stock of adaptive capital reduces those damages and there are some sort of consistency conditions that you can put on this damage function D here that give you to give you the results in the model a hairs exogenous technological development and here are adaptation costs and here is the consumption that the economy is doing so this is really the variable that you care about you want to maximize consumption you maximize utility and here is the equation for adaptive stock capital stocks so we're just investing we're taking output we're taking some of the output away from consumption and we're putting it into investment in the adaptive capital stock and that depreciates at a certain rate so I'm not going to go too much into detail some more math here but the if you simplify the model and this is always a useful thing to do so the model even even a simple model like this certainly much much simpler than some of the most we saw yesterday which makes it more transparent is very difficult to solve to get sort of analytic and qualitative results in generality so we make some simplifications we assume for in the best case scenario that there were no adjustment costs that is to say you lose nothing by investing rapidly in climate change and in this case we can derive an expression for the optimal level of investment in adaptation and it looks like this it has three components the first is just depreciation so you invest enough to keep your adaptive capital from depreciating the second is a set of sort of wealth effect so as your economy grows so this term represents the growth in the vulnerable capital stock that your economy is developing you change your adaptive capital investment strategy using this function RV here okay and also there's a component that comes from the fact that the climate is changing so x dot represents the change in climate and RX is another function that tells you how you respond to a change in climate in your investment strategy in adaptation so there's a couple of things to note here first there's a proposition that says that when climate change is getting worse when temperatures are increasing and you are growing then it is optimal to in to have a non-zero investment in adaptation so the strong position that says you should simply forget about adaptation and do investment is almost certainly wrong okay and this is just a piece of mathematics that comes out of very simple economic assumptions on the damage function the second proposition says that if your economy is growing okay and sorry if your economy is growing then this term here RV is decreasing that is to say as your if you compare a richer to a poorer economy then your proportional response to a change in the level of development is to reduce the level of investment in adaptation so that kind of goes in the right in the same direction as the people argue that more developed economies should invest less right in adaptation because they're essentially already protected however that the opposite the same is not true for this term so for this term here what you can find is that if the sort of damage reduction effect of an additional unit of adaptive capital outweighs the diminishing returns effect so the more adaptive capital you have the lower the returns from that unit of adaptive capital and certainly the more adaptive capital you have the more you reduce the marginal unit of damage then then it's the case that this in fact increases as the capital stock increases so it's possible that it could go either way and it really depends on the empirical details so let's look at the empirical details so we're going to simulate the model using now full adjustment cost and simulate a full model by and we're applying it to sub-Saharan Africa why as I said it's a small region and it's also highly vulnerable to climate change so it's an appropriate compare an appropriate simulation we're going to choose some model parameters and it's just important to note that the model parameters account for things like flow adaptation which is adaptation that happens in a single period and also for the sort of elasticity of damages with respect to the income of the country so here's a base case model results so the red curves here are the percentage damages damages is a percentage of GDP without any adaptation so this is to say you're adapting optimally but look at damages had you not adapted right and the black curve is when you when you adapt optimally what are actual damages and what I've got here is three different scenarios of business as usual scenario which is a solid line scenario where you stabilize CO2 concentrations at twice their pre-industrial level and a scenario where you'd stabilize them at 1.5 times their pre-industrial level as you can see adaptation is very effective at reducing these damages this is an enormous drop for example at in 200 years from now if in if we continue in business as usual you're going from about 20% to about 15% damages so that's a very large saving and the costs are relatively small so that this is the per-period cost of adaptation investment and those are sort of of the order of point one percent of GDP per year but remember it's accumulating so it's the cumulative effect of adaptation that really gives you this reduction in damages you can see the same thing here so this is a plot of climate sensitivity versus the welfare of the country so climate sensitivity remember is a measure of how strongly the climate responds to global emissions so that determines a temperature trajectory which is sort of more and more hot the higher is climate sensitivity and you can see that basically these are all sort of optimal investment strategies and you can see that basically a optimal adaptation buys you essentially 1.5 degrees of climate sensitivity that is to say this is the welfare curve with adaptation this is the welfare curve without adaptation and these points are sort of roughly on a line so that one matches up with that one and that one matches up with that one roughly and you sort of save about 1.5 degrees of climate sensitivity by adapting optimally in this model now this is really the sort of key take-home message of the paper what I've got here is a plot of the stock of adaptive of vulnerable capital that is normal investment capital versus versus sorry the ratio of vulnerable capital to the to the stock of adaptive capital so this is a measure of how much of each thing I have as a function of time and remember they're being chosen optimally so dynamically over time you're choosing optimally these capital stocks what you find is that this ratio is declining for the first 50 years so what does that mean well it means that the adaptive capital stock is growing faster than the vulnerable capital stock for the first 50 years and then it starts to sort of even out so around after 50 75 years the growth rates start to equalize and then slowly once you've sort of adjusted and overcome your adaptation deficit in the beginning then then the the stock start to grow at a more sort of equal rate so the conclusion from this this figure is really that it's indeed the case that you know sort of an investment in adaptation is a smart strategy at least in the early time periods so we can break that conclusion by reducing the effectiveness of adaptation so there's a parameter in model that tells you how effective adaptation is a reducing climate damages and here you see we've chosen a very very low adaptation for effectiveness parameter and you can see that for the first this is extremely low value so for the first of 25 years you continue to grow the stock of a vulnerable capital faster than the stock of adaptive capital but then after that you actually sort of turn around again and you get the same kind of shape that we had in the previous figure so there's some sensitivity analysis the results are pretty much independent of adjustment costs no matter how big they are with any kind of sensible parameterization you find that in fact it's still optimal to grow adaptive capital fast in the first 50 years and this is a graph of welfare as a function of this parameter and you can see that the more effective is adaptation is so that's measured by the the x-axis here as you go right words your welfare really increases sort of non-linearly with this parameter so a if we can improve adaptation and effectiveness that's a really good thing b we really need to know this parameter to in order to understand what the right strategy is because as we as I've just shown you it depends very strongly at least in the near term what the parameter value is in terms of whether you should grow adaptation or vulnerable capital fast in the next 25 years so here are some conclusions we've developed a very simple transparent model for informing policy discussions in most plausible cases that's pretty much all the parameter values that we've investigated and if you look in the paper there's a much more complete sensitivity analysis I've shown you a very small subset of results in this presentation in most in most cases it's really optimal to grow adaptation capital quite rapidly over the next 50 years and certainly more rapidly than you grow the stock of vulnerable capital that's true except so it's a robust finding except with respect to the effectiveness of adaptation parameter and with respect to the initial stock of adaptive capital but really that is almost certainly very very low so that's not really a sort of relevant parameter so really it's the effectiveness of adaptation that we should pin focus on putting down empirically and so our analytics show that the sort of simple ad hoc prescriptions the sort of intuitive findings you know that really well if you look across the world developed countries are much less vulnerable to climate variability therefore when you adapting to climate change you should really focus on development that kind of ad hoc prescription is really insufficient for setting policy what you really need is some detailed empirics because the the answer really depends on the parameters and it depends on the initial conditions of the problem now there are all sorts of caveats to this kind of analysis it's a sort of first step economic model you would really want a model that comes from certainty and learning and thresholds and extreme events and the role of institutions and governance and all these things however transparent simple easy to use you can run it on your laptop and under a minute so I think it's a good platform for at least beginning to investigate some of these issues thanks very much