Climate Impacts on Capital Accumulation in the Small Island State of Barbados

Abstract

This paper constructs a model of climate-related damage for small island developing states (SIDS). We focus on the loss of private productive capital stocks through extreme climate events. In contrast to most economic analyses of climate impacts, which assume temperature-dependent damage functions, we draw on the engineering literature to allow for a greater or lesser degree of anticipation of climate change when designing capital stocks and balancing current adaptation expenditure against future loss and damage. We apply the model to tropical storm damage in the small island developing state of Barbados and show how anticipatory behavior changes the damage to infrastructure for the same degree of climate change. Thus, in the model, damage depends on behavior as well as climate variables.Sustainability 2019, 11, 3192 2 of 23 compute climate damage assume a "damage function" that depends on global mean temperature [13]. While most are aggregate, the FUND model takes a disaggregated approach, with separate damage functions for different kinds of climate impacts [14,15]. Each damage function depends on the global climate (either global temperature or greenhouse gas concentration) and the average income.This paper develops a sub-global simulation model that includes both climate damage and economic sub-models. It is applied to a national scale but could also be applied to a regional scale. The economic sub-model is structuralist [5,16,17], which makes it similar to the post-Keynesian model by Rezai et al. [10], but different from, for example, the DSGE model presented in [18] or the neoclassical FUND and DICE models. The goal for the climate damage sub-model is to represent the loss of productive capital through extreme climate events, whereby, "productive capital" represents the physical stocks used to produce goods and services for sale, as opposed to non-commercial capital, non-productive commercial capital (such as protective structures) and public infrastructure.We depart from both FUND and DICE by proposing a behaviorally-motivated model for climate damage, rather than a parameterized model. This is useful for simulation, because it allows for a richer set of alternative scenarios and policy options by targeting specific behavioral rules. In this paper, we focus on how anticipation of climate damage affects adaptation expenditure, but extensions of the model could introduce additional behaviors, such as different degrees of recovery after disaster. Furthermore, we differ from FUND and DICE by representing climate damage to capital stocks rather than as a loss in GDP. As noted by Piontek et al. [19], loss of inputs to production have different effects than loss of outputs. The inclusion of adaptive behaviors and the loss of physical capital also distinguishes the study from that of Moore et al. [6], who applied RICE, the regional version of the DICE model, to a study of climate impacts in the Caribbean. Moore et al. employed a general equilibrium analysis, which contrasts both with partial equilibrium analyses, ...

A Climate-Economy Policy Model for Barbados

“…The model runs that produced the figure assumed that future construction standards were guided by historical climate. As discussed in Kemp-Benedict et al (2019), the model allows for standards to change in response to expected climate change. If an expectation of stronger and more frequent storms were incorporated into planning, then damage costs would be lower but would be partially offset by higher adaptation costs.…”

“…In the present model, only the CCRIF is represented. Following Kemp-Benedict et al (2019), firms are assumed to carry out their cost-benefit analysis of climate adaptation with the expectation that they will pay for damages out 6…”

“…Nevertheless, it is periodically struck, sometimes severely. Kemp-Benedict et al (2019) estimate a strike probability for Barbados of just over one-third for storms in the Eastern Caribbean.…”

“…With extremely wide variation, the trend is towards an increasing number of tropical storms through 2050, with no change beyond that. In this paper, we use a model developed by Kemp-Benedict et al (2019) that relates storm intensity and frequency in the Eastern Caribbean to changes in sea-surface temperature (SST). In contrast to projections of tropical cyclones, climate models unambiguously suggest rising SST, whether at global scale, in the tropics, or in the North Atlantic (Villarini and Vecchi 2012).…”

“…Of these variables, g source is computed using the model described in the previous section, e source is computed using an exogenously specified exchange rate e, the computed price level in Barbados, and price indices in source countries, and A is given exogenously. The hurricane dummy h is computed using a storm damage model documented in Kemp-Benedict et al (2019), as described in the next section.…”