Adaptor of last resort? An economic perspective on the Government’s role in adaptation to climate change

Authors: Leo Dobes, Frank Jotzo and Patrick Doupé
Year: 2013

The primary objective of this project was to investigate the issues associated with government assuming the role of insurer of last resort with respect to adaptation to climate change.The authors concluded that the government should not act as an adaptor of first or last resort, but rather indicated that government can best contribute to efficient adaptation by reducing the economic costs and institutional barriers to adaptation faced by individuals and organisations, allowing citizens to take decisions flexibly and in accord with local circumstances. The first stage of this project involved an analysis and review of the economics and policy literature to clarify the scope with which government could usefully play the broader role of adaptor of last resort. Governments can reduce the risks faced by citizens in two major ways: regulation and reallocation of risk (e.g. government-sponsored insurance sharing otherwise uninsurable events among taxpayers in general). However, governments are not capable of alleviating all risks due to the intrinsic multiplicity of variables and individual preferences unobservable to planners. Given the additional uncertainties in how, when and where climate change impacts will manifest, it is unlikely that top-down adaptation programs could deliver efficient outcomes. There are a number of examples given of where government assistance is not necessarily helpful in dealing with risks and change, and can even have adverse side-effects. Since a standard justification for government intervention is market failure, including misperception of risks, the second part of the project investigated the effect on Brisbane property prices of the 2008 online release of flood risk information and the effect of the 2011 flood. The findings from this case study suggest that there may be an arguable case for ensuring that government information about flood risk differentiates between degrees of risk, to allow people to form their own judgements.

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