Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/316217 
Year of Publication: 
2025
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2025-030/VI
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We analyse optimal investment in one of the most important forms of climate adaptation: flood protection. Investments to build and heighten dykes and surge barriers involve considerable adjustment costs, so that their construction locks in the level of flood protection for some time. Investment decisions must take into account both economic and sea level rise uncertainty over a horizon of several decades, where the latter is to a large extent driven by global warming. We put forward a tractable macro-finance DSGE model that includes flood risk. We obtain solutions for optimal flood protection as a function of these uncertainties, costs, and preferences regarding impatience, risk aversion and intertemporal substitution. Sea level rise uncertainty always leads to more flood protection. Economic uncertainty leads to less (more) protection if the elasticity of substitution is greater (less) than one. We illustrate our results with a calibrated case study for the Netherlands.
Subjects: 
Sea level rise
flood risk
macroeconomic risk
climate adaptation
discounting
risk aversion
intertemporal substitution
JEL: 
F64
Q51
Q54
Document Type: 
Working Paper

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