Measuring the economic impact of climate change is naturally challenging. Climate change is a global phenomenon that affects localities differentially, evolving in complex ways over long periods of time. In response to its most salient consequences, agents react by changing their behaviour. Some move to areas that are cooler or are not subject to inundation or regular storms, some others prefer to invest in alternative locations and renewable energy, and yet others decide to ramp up their savings for a more uncertain future. These reactions, and their aggregate consequences, ultimately determine the economic cost of climate change.
One of the main consequences of climate change is the rise in sea levels due to the thermal expansion of the oceans and the melting of ice sheets. A higher sea level can cause permanent inundation along coastlines, potentially threatening the future of many cities. Of course, climate change can also pose other more temporary threats to coastal areas, such as an increase in the frequency of storms and episodic flooding. Evaluating the economic impact of permanent sea-level rise is relevant not only for articulating policies aimed at reducing global warming, but also for designing countervailing measures, such as the building of levees and the introduction of relocation incentives.
As sea levels rise, the effect on locations along the coastline will be heterogeneous. One reason is that the elevation of coastal areas varies tremendously. Another reason is that, due to ocean dynamics and tectonics, sea-level rise will not be uniform across space (Kopp et al. 2014, 2017). Hence, evaluating the economic impact of coastal flooding with even basic accuracy requires incorporating spatial detail. Using aggregate loss functions that relate the future path of the aggregate economy to the evolution of climate variables, as done in the Intergovernmental Panel on Climate Change (IPCC) reports or the work of Nordhaus (2008, 2010), would therefore not be appropriate for assessing the effect of sea-level rise. However, the introduction of spatial detail has typically come at the cost of ignoring dynamics and adaptation. Assessments of coastal flooding have often reverted to the simple addition of the current economic activity that is threatened by the rising sea level (as in Dasgupta et al. 2007). So far, the few studies that introduce some dynamics do not go beyond using very aggregate future projections to measure the economic activity that is at risk (as in Nicholls 2004).