Sustainable growth and modernization under environmental hazard and adaptation

We develop an aggregated model to study rational environmental adaptation policies that compensate negative consequences of certain environmental hazards and changes. The model distinguishes three categories of adaptation measures that (a) compensate the decrease of the environmental amenity value, (b) compensate the decrease of total productivity, (c) develop and introduce new hazard-protected capital and technology. We analyze the optimal balance among investment, consumption, and different categories of adaptation investments. It appears that the environmental hazard and subsequent adaptation do not lead in the long run to a higher level of capital modernization compared to the benchmark case with no hazard. A synergism between productivity-related and amenity-related adaptation activities arises because the productivity-related adaptation positively impacts the economy and creates better possibilities for the amenity adaptation.