Integrated Assessment Models (IAMS) have helped us over the past decade to understand the interactions between the environment and the economy in the context of climate change. Although it has also long been recognized that adaptation is a powerful and necessary tool to combat the adverse effects of climate change, most IAMS have not explicitly included the option of adaptation in combating climate change. This paper adds to the IAM and climate change literature by explicitly including adaptation in an IAM, thereby making the trade-offs between adaptation and mitigation visible. Specifically, a theoretical framework is created and used to implement adaptation as a decision variable into the DICE model. We use our new AD-DICE model to derive the adaptation cost functions implicit in the DICE model. In our set-up, adaptation and mitigation decisions are separable and AD-DICE can mimic DICE when adaptation is optimal. We find that our specification of the adaptation costs is robust with respect to the mitigation policy scenarios and parameter values. Our numerical results show that adaptation is a powerful option to combat climate change, as it reduces most of the potential costs of climate change in earlier periods, while mitigation does so in later periods.

This report examines adaptation and mitigation within an integrated framework. Global and regional costs of adaptation are assessed dynamically and the resulting benefits are quantified. This is accomplished by developing a framework to incorporate adaptation as a policy variable within three Integrated Assessment Models (IAMs); the global Dynamic Integrated model of Climate and the Economy (DICE), the Regional Integrated model of Climate and the Economy (RICE), and the World Induced Technical Change Hybrid (WITCH) model. The framework developed here takes into account investments in reactive adaptation and in adaptation "stocks", as well as investments in building adaptive capacity. This report presents the first inter-model comparison of results on adaptation costs using the emerging category of adaptation-IAMs. Results show that least-cost policy response to climate change will need to involve subsantial amounts of mitigation efforts, investments in adaptation stock, reactive adaptation measures and adaptive capacity to limit the remaining damages.

We examine the impact of technological change on the stability of climate coalitions and explore how international cooperation on abatement affects the incentives of signatories to invest in R&D to reduce emissions. We compare the case of no technological change with exogenous technological change and induced technological change. In the latter case R&D investments are endogenous. We find that the highest equilibrium pay-offs are achieved in the case of induced technological change. Furthermore, the formation of a climate coalition boosts R&D investments in carbon abatement technologies in signatory countries.

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