Emissions control cannot address the consequences of global warming for weather disasters until decades later. We model regional-level mitigation or adaptation, which reduces disaster risks to capital in the interim. Mitigation depends on belief regarding the adverse consequences of global warming. Pessimism jumps with a disaster and slowly reverts in the absence of arrivals. Mitigation spending by firms is less than first-best because of externalities. We prove that capital taxes to fund public mitigation, which requires collective action, restores first-best. We apply our model to country-level mitigation of major tropical cyclones, using GDP growth damages, government flood-control budgets, and climate-model projections of increasing cyclone frequency. For a typical country exposed to cyclones, a disaster arrival not only damages its capital stock, but elevates perceived risks, and as a result has persistent effects on taxes, the mix of private and public mitigation, growth, and welfare.

Harrison Hong, Jinqiang Yang, and Neng Wang
Working Paper
Publication Date

Full Citation

Hong, Harrison, Jinqiang Yang, and Neng Wang
. Mitigating Disaster Risks in The Age Of Climate Change. December 01, 2021.