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Abstract: The dominant assumption in economic models of climate policy remains that adaptation will be implemented in an optimal manner. There are, however, several reasons why optimal levels of adaptation may not be attainable. This paper investigates the effects of suboptimal levels of adaptation caused by different types of adaptation restrictions, on the composition and level of climate change costs and on welfare. We find that especially restrictions to the effectiveness of adaptation at more extreme levels of climate change can be very harmful. Furthermore we show that the potential of mitigation to offset suboptimal adaptation varies from being essential in case adaptation becomes ineffective at higher temperature increases, to being largely ineffective in case of short-term inaction. However, in all cases the short-term recommendation is to increase mitigation levels slightly above what is normally recommended, and to keep mitigation policies flexible enough to be able to respond when adaptation restrictions become more prominent. It is clear that by reducing adaptation restrictions, in combination with adjusting the optimal level of mitigation may keep the costs of adaptation restrictions limited, and thus generally it is very harmful to ignore existing restrictions on adaptation when devising (efficient) climate policies. [Copyright &y& Elsevier]

Abstract: Recent proposals at the UNFCCC meeting in Bali in December 2007 suggest that a 2% levy on the CDM could finance adaptation costs in developing regions. Other proposals include extending the scope of the levy to emissions trading. This study applies an Integrated Assessment Model to gain insight in the interactions between adaptation costs, residual damages and mitigation costs and to analyse the effectiveness of a 2% levy on both the CDM and emissions trading from developing countries. We show that adaptation is especially important in lower income regions where damages are higher. The revenues of a 2% levy strongly depend on both the climate mitigation target and the burden-sharing regime. A more stringent climate mitigation target results in more emissions trade and, in the longer run, less need for adaptation. Both factors increase the share of adaptation costs that can be funded. The burden-sharing regime strongly affects the revenues of a 2% levy as well: relatively more stringent targets for developed countries increase the revenues of a 2% levy. However, in the next two decades the share of adaptation that can be financed remains well below 20% in most cases. Additional funding mechanisms are therefore necessary to substantially finance adaptation costs in developing countries. [Copyright &y& Elsevier]