Mitigation, Adaptation and Cooperation in Response to Climate Disaster

Abstract We analyze the tradeoff between mitigation and adaptation in response to irreversible climate disaster in a transboundary pollution differential game with a stochastic regime shift. Countries can reduce their emissions to decrease the likelihood that the shift occurs, or proactively invest in adaptation to reduce the impact of the shift. We characterize the social optimum and the non-cooperative Markov-perfect Nash equilibrium (MPNE). In the social optimum, adaptation complements mitigation and increases expected welfare. In contrast, in the MPNE the option to adapt crowds out mitigation, reduces precautionary behavior, and decreases expected welfare. Our analysis stresses the importance of strategic interactions when countries can use multiple policy instruments to combat climate change.