Uncertainty and Hysteresis in Adapting to Global Climate |

Uncertainty and Hysteresis in Adapting to Global Climate


Global climate change is one of the greatest environmental challenges facing the civilization, and despite efforts in mitigating emissions of greenhouse gases (GHGs), global temperature is likely to rise, possibly significantly. Climate change is characterized by several features that distinguish it from other environmental problems, including high degrees of uncertainties in assessing its impacts, the global nature of the public goods problem, and the scale of activities needed in adapting to the change. Adaptation is defined as a set of activities that reflect major changes in resource allocation in response to large scale and long-term environmental changes. It includes mitigation activities, technological and institutional innovation and adoption, and environmentally driven mass migration. Major adaptation activities share several common features: high degrees of uncertainties in the associated costs and benefits, significant sunk costs that are hard to be recouped if the activities fail to generate the expected benefits, and the opportunities of learning about these uncertainties. Prof Jinhua Zhao argues that the real options approach provides a convenient framework for studying adaptation to climate change. The main lesson from the real options framework is that when adaptation decisions involve sunk investments, an agent has incentive to wait and gather more information about the payoffs to avoid losses. Information’s value lies not only in reducing the likelihood of “bad” investments but also in enabling earlier actions in
undertaking “good” investments. This value is even higher when agents can learn from each other about the best adaptation decisions so that each has incentive to wait for others to adapt first. Prof Zhao presents the essence of the real options model and discuss two applications of the real options framework to adaptation research: water markets and water rights, and farmer decisions to grow dedicated energy crops.

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1. Prof Jinhua Zhao, Professor in the Department of Economics and the Department of Agricultural, Food and Resource Economics, and Director of Environmental Science and Policy Program, Michigan State University 2. Assoc Prof John Kerr, Associate Professor in the Department of Community, Agriculture, Recreation and Resource, Studies, Michigan State University

Tuesday, 15 March 2011
5.15 p.m. - 6.30 p.m.

Seminar Room 2-1
Level 2, Manasseh Meyer
Lee Kuan Yew School of Public Policy
469C Bukit Timah Road
Singapore 259772

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