On the strategic interaction between mitigation and adaptation/ Seraina Buob

The first part of the thesis analyzes the strategic interaction between mitigation and adaptation in a game-theoretic framework. Chapter 2 is based on a non-cooperative setting with symmetric regions assuming that mitigation and adaptation are perfect substitutes in protecting regions against climate impacts. We allow for a step-by-step decision making, where mitigation is chosen first and adaptation second, and where the benefits of mitigation accrue only in the future. If marginal costs of adaptation negatively depend on global mitigation and if regions have relatively high incomes, they simultaneously invest in both mitigation and adaptation. However, we show that if regions are relatively poor, they engage in mitigation only. As world regions not only differ with respect to their income but also with respect to their exposure to climate change, the symmetry assumption in Chapter 2 is rather restrictive. We therefore extend the dynamic game in Chapter 2 by allowing for asymmetry among regions and show that an industrialized region, which is not exposed to climate change, invests in adaptation only and the developing region is the only contributor to mitigation. In contrast, if the industrialized region is exposed to climate change, the burden of mitigation shifts from the developing to the industrialized region. The second part of the thesis focuses on the incentives to fund adaptation in developing countries. Chapter 4 conducts a positive analysis of the strategic aspects of adaptation funding with a two-stage non-cooperative game, where adaptation funding is chosen by the industrialized country in the first stage while both countries simultaneously decide on mitigation in the second. It is shown that the industrialized country has an incentive to fund adaptation only if the funding induces a shift of the burden of mitigation from the industrialized to the developing country, which in turn may harm the developing country in terms of welfare. As Chapter 4 is relatively narrow in scope due to its focus on adaptation funding as a strategic investment by the North, Chapter 5 then examines the robustness of the result found in Chapter 4 in a more general setting. Different sequences of the decision making on adaptation funding by the industrialized country are analyzed, which allows to comprehensively analyze the incentive compatibility of funding adaptation in a more general setting. Overall, Chapter 5 concludes that the industrialized country has an incentive to fund adaptation only if adaptation funding serves as a strategic device to induce the developing country to increase its engagement in mitigation. It therewith confirms the finding of Chapter 4 even in a more general setting.