This VoxDevTalks is the final episode in a mini-series of podcast episodes covering the BREAD-IGCvirtual PhD-level course on urban economics.
In this episode of VoxDevTalks, Tim Phillips speaks to Matthew Kahn and Siqi Zheng about the market's role in driving urban adaptation and how policymakers can effectively support these efforts.
How can people in cities adapt to climate change
Adaptation refers to the process of learning from past shocks and applying those lessons to mitigate the impact of future shocks. Since both natural disasters and real estate are inherently tied to specific locations, they are closely interconnected. This raises the question of adaptation in this context: should we relocate people away from vulnerable buildings or should we focus on enhancing the resilience of the buildings themselves?
How can a policymaker support urban adaptation
‘a mayor, who’s aware that climate change is accelerating rural to urban migration has two different strategies…one is to play nice and to get ready for this migration. Another is to repel this group by making the quality of life of the slums worse.’
A notable example of this can be seen in Brazil, where research by Feler and Henderson (2011) found that Brazilian mayors, responded to the threat of migration into cities by not connecting slums to the water system. This is not the type of response policymakers should pursue. Instead, they should adopt a proactive approach that facilitates migration considering all aspects of urban life. This includes ensuring the availability of quality housing, access to clean water, reliable electricity and transportation systems that improve connectivity to work and shops. These considerations become increasingly urgent as climate change drives more migration and rising urban density intensifies pressures on city infrastructure.
Development and the process of adaptation
Countries with a single dominant city, such as Dhaka in Bangladesh, can be contrasted with those like the United States, which has around 300 major cities. Having numerous smaller cities offers potential advantages for urban adaptation, as competition among cities can incentivise investment into adaptation.
There is also a strong complementarity between cities and skill development. Living in cities encourages people to invest in human capital and skills, creating a dual benefit for national development. As a country grows, individuals become wealthier, enabling them to afford personal adaptation measures, such as air conditioning. Additionally, these higher skill levels enhance the capacity to engage in adaptation.
Can the state crowd-out private investment in adaptation?
Recent research by Allan Hsiao highlights a potential unintended consequence of state efforts to protect against rising sea levels: these measures may inadvertently encourage people to move to and build in vulnerable areas, as they know they will be protected by the government.
‘so when the government bubble wraps a place,…,do people invest less in their own self protection if they perceive that they’re safe? And this requires a lot more research…I’d love to live in a world where government efforts are a complement to private self-protection not a substitute.’
The value of information in helping individuals adapt
Evidence from the US (Fairweather et al. 2024) indicates that providing flood risk information to prospective homebuyers influences their behaviour, leading them to search for houses in safer areas and bid less for properties in high-risk zones.
Climate science is also crucial in identifying regions with significant climate risks. However, since obtaining this information can be costly, supporting resilient rural-to-urban migration may require assisting individuals in accessing and utilising this data effectively.
‘I believe that people are adults and research their decisions, but climate information can be costly to acquire. So, an educated consumer is more likely to make a good choice if they are aware of the risks.’
How can developers be incentivised to build green
Buildings contribute significantly to cities' emissions and energy use, making it essential to explore incentives for decarbonising development. In some cases, energy-efficient buildings can command a price premium, but this is not universal. In markets that are less mature or face constraints, such a premium may be less pronounced. A major challenge in this context is the information asymmetry between property developers and buyers. Buyers often cannot fully assess a building’s quality, energy efficiency or comfort until they have lived in it.
In developed countries like the UK, efforts to address this issue include green building certification programmes, which simplify the information challenge for consumers. Research by Siqi Zheng in China highlights that simply providing individuals with an information card explaining the concept of green buildings significantly increases their willingness to pay for such properties.
Split incentives prevent necessary green investments
Another market failure arises from misaligned incentives. Consider an older building in need of retrofitting, where individual flats are rented out, but the communal areas are maintained by the landlord. In this scenario, the landlord bears the cost of retrofitting, while the renters reap the benefits of lower energy bills. This creates little incentive for the landlord to invest and renters also lack motivation since they do not own the property.
One potential solution is the implementation of a green lease. This mechanism introduces clauses to address these challenges, outlining how to share the initial costs and distribute the benefits, thereby aligning the interests of both landlords and renters.
How may developing countries have an advantage when it comes to building adaptive cities?
Retrofitting older buildings is often challenging. However, developing countries, which are experiencing significant construction activity, have a unique opportunity to build energy-efficient structures that can remain sustainable for 50 to 100 years. To capitalise on this potential, these countries need to consider strategies that leverage the private market.
How applicable is the data from developed countries for developing countries?
‘certain lessons the developing world can learn from the US and European experience, but some lessons will have to be relearned the hard way.’
Conducting similar research in developing countries as in developed ones is often challenging due to limited data availability. While new data sources, such as satellite imagery or cell phone data, provide valuable insights, traditional data required for in-depth analyses may still be lacking. However, advances in techniques like machine learning and other innovative methods could help bridge this gap.
Collaboration also plays a vital role in overcoming these challenges. For instance, conferences that bring together African officials and business leaders to visit cities like Amsterdam can facilitate the exchange of ideas, allowing participants to learn from both successes and shortcomings in urban development at a relatively low cost. This highlights the critical importance of idea transfer in helping developing countries address the complex challenges cities face.
‘demand creates supply is part of my free market optimism about the ability of an urbanised world to step up and confront the very serious challenges we face.’
References
Fairweather, D, M E Kahn, R Metcalfe, and S Sandoval Olascoaga (2024), “Expecting climate change: A nationwide field experiment in the housing market,” NBER Working Paper No. w33119. Available at SSRN: https://ssrn.com/abstract=5016352.
Feler, L, and J V Henderson (2011), “Exclusionary policies in urban development: Under-servicing migrant households in Brazilian cities,” Journal of Urban Economics, 69(3): 253–272. https://doi.org/10.1016/j.jue.2010.09.005.