The Return of Adaptation to Extreme Weather

We estimate the return of climate adaptation by modeling the uncertain impact of global warming for extreme weather. Unexpected arrivals elevate extreme-weather risk, which leads households and firms to adapt and thereby lowering the damage of each subsequent arrival. Our approach provides country-specific estimates of disaster risk as extreme-weather events unfold, and state-dependent marginal effects of extreme-weather damage on economic growth. Applying our approach to cyclones and heatwaves from 1980-2019, average country income in 2019 is several percent lower absent state-dependent adaptation. Adaptation becomes significantly more valuable in the long run as the uncertainty regarding extreme weather is resolved.