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FORPOL-00691; No of Pages 7 ARTICLE IN PRESS Forest Policy and Economics xxx (2010) xxx–xxx Contents lists available at ScienceDirect Forest Policy and Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / f o r p o l Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment Tim Williamson a,⁎, Hayley Hesseln b,1, Mark Johnston c,2 a b c Natural Resources Canada, Canadian Forest Service, 5320-122 st, Edmonton, AB, Canada T6H 3S5 University of the Arctic at University of Saskatchewan, 51 Campus Drive, Saskatoon, SK, Canada S7N 5A8 Saskatchewan Research Council, 125 15 Innovation Blvd., Saskatoon, SK, Canada S7N 2X8 a r t i c l e i n f o Available online xxxx Keywords: Climate change Vulnerability Economic efficiency Equity Adaptive capacity Adaptive capacity deficit Market failure Irrational behaviour Institutional failure Economic systems a b s t r a c t This paper considers two ways that economic concepts inform adaptive capacity assessments within the context of climate change vulnerability analysis. First, using an economics framework, there are rational and logical reasons why different individuals and different organized human systems have different levels of adaptive capacity and these differences do not necessarily correlate to differences in vulnerability. An alternative approach is to determine where there are factors leading to socially inequitable or economically sub-optimal investment in adaptive capacity assets or reduced effectiveness of adaptive capacity assets resulting in adaptive capacity deficits. Factors contributing to adaptive capacity deficits include cases of irrational agent behaviour and cases where there are political, social, and economic system failures. A second way current adaptive capacity constructs can be enhanced is by taking explicit account of the adaptive capacity of economic systems. Economic system properties such as scale, diversity, relative mix of the private and public sectors, innovation, organizational/managerial capital, substitutability of inputs, factor mobility, liquidity of assets, etc. will affect the capacity of economic systems to adapt. Crown Copyright © 2010 Published by Elsevier B.V. All rights reserved. 1. Introduction Climate change has important implications for forests and organized human systems that are associated with forest resources (Williamson et al., 2009). Adaptation has the potential to reduce impacts; however, before adaptation can proceed an understanding of forest sector vulnerabilities is required (Johnston and Williamson, 2007). The vulnerability of organized human systems to current and future climate change is a function of exposure, sensitivity, and adaptive capacity (Fussel and Klein, 2006). This paper explores two areas where economics can inform and enhance current approaches to determining and interpreting adaptive capacity in the context of climate change vulnerability assessment. First, the paper proposes a complementary construct — namely, adaptive capacity deficits. Adaptive capacity deficits are an extension of the concept of adaptation deficit proposed by Burton (2004) and Burton and May (2004). Different human systems have different levels of adaptive capacity and these differences are normal and expected. Differences in adaptive capacity can arise because of differences in requirement (or demand), supply (or cost), and income. Therefore, determinations of relatively high or low adaptive ⁎ Corresponding author. Tel.: +1 780 435 7372. E-mail addresses: [email protected] (T. Williamson), [email protected] (H. Hesseln), [email protected] (M. Johnston). 1 Tel.: +1 306 966 8407. 2 Tel.: +1 306 933 8175. capacity for a particular system does not necessarily mean that the system is relatively less or more vulnerable to climate change effects compared to other systems. A more direct approach is to determine where circumstances result in socially unacceptable distributions of adaptive capacity, or economically sub-optimal investment in adaptive capacity, or reduced efficacy of current adaptive capacity assets. Inequity, economic inefficiency, and reduced efficacy are symptoms of a system that is experiencing an adaptive capacity deficit. Adaptive capacity deficits are caused by irrational choices and system (economic, social, institutional, political) failures and it is the manifestation of adaptive capacity deficits that causes a system to be vulnerable. A second area where economics can contribute to current approaches is by more directly incorporating properties affecting the adaptive capacity of economic systems into broader adaptive capacity constructs. The current focus of adaptive/community capacity approaches is mainly on social determinants and socially organized systems (e.g. resource-based communities). However, local economies will also be impacted by climate change and the response of economies and their inherent capacity to adapt will have a significant effect on the overall adaptive capacity of integrated social and economic systems. However, features and properties of economies that affect their capacity to adapt (e.g. relative roles of markets vs. public intervention, market efficiency and failure, economic diversity, the nature of technologies, substitution elasticity, scale, flexibility, location or remoteness, potential differences between short- and long-term adaptive capacity) are generally not included in current constructs. 1389-9341/$ – see front matter. Crown Copyright © 2010 Published by Elsevier B.V. All rights reserved. doi:10.1016/j.forpol.2010.04.003 Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003 ARTICLE IN PRESS 2 T. Williamson et al. / Forest Policy and Economics xxx (2010) xxx–xxx 2. Current constructs for adaptive capacity assessment The Intergovernmental Panel on Climate Change defines adaptive capacity as “…the degree to which adjustments in practices, processes, or structures can moderate or offset the potential for damage or take advantage of opportunities created by a given change in climate” (IPCC, 2001). This definition is relatively unambiguous. There are, however, various approaches pertaining to how adaptive capacity and community capacity are applied and measured. Current mainstream constructs can arguably be grouped into two broad categories: the general approach and the community capacity approach. 2.1. General approach The Intergovernmental Panel on Climate Change Third and Fourth Assessment reports (Smit and Pilifosova, 2001; Adger et al., 2007; Klein et al., 2007) present a general approach to adaptive capacity assessment that relies on the assessment of determinants. Smit and Pilifosova (2001) suggest that economic resources, availability of technological options, information capture and management skills, infrastructure, institutions, and equity constitute the key determinants of adaptive capacity. Numerous authors have proposed additional and/or alternative measures and indicators of adaptive capacity. Adger et al. (2004), for example, suggest that specific indicators and measures of adaptive capacity include wealth, inequality, educational commitment, isolation of rural communities, quality of basic infrastructure, political influence, willingness to invest in adaptation, and environmental sustainability measures. Yohe and Tol (2002) introduce human and social capital, access to risk spreading mechanisms, and perceptions of risk as determinants of adaptive capacity. The Fourth Assessment Report (FAR) (Adger et al., 2007; Klein et al., 2007) reflects a growing literature on adaptive capacity and presents a more comprehensive approach for adaptive capacity assessment. The method, frameworks, approaches, and concepts described in the FAR move toward the community capacity approach outlined in the next section. For example, the FAR states: “The capacity to adapt is dynamic and influenced by economic and natural resources, social networks, entitlements, institutions and governance, human resources, and technology.” (Adger et al., 2007, p. 719). The FAR summarizes their assessment of adaptive capacity as follows: “In summary, empirical research carried out since the TAR has shown that there are rarely simple cause–effect relationships between climate change risks and the capacity to adapt. Adaptive capacity can vary over time and is affected by multiple processes of change. In general, the emerging literatures show that the distribution of adaptive capacity within and across societies represents a major challenge for development and a major constraint to the effectiveness of any adaptation strategy.” Chapter 17 of the FAR identifies limits and barriers to adaptation. They identify physical and ecological limits, technological limits, financial barriers, informational and cognitive barriers, and social and cultural barriers as key areas that may limit adaptation. The general approach to adaptive capacity assessment is useful because it has broad applicability and it is practical, straightforward, and intuitive. It leads to assessment and measurement approaches that are feasible, tractable for policy analysis, and intuitive. The general approach for adaptive capacity assessment can result in policy-relevant assessments of current capacity to adapt and potentially about the adaptive capacity requirements of systems. A drawback of this approach is that it is difficult to interpret whether current adaptive capacity level is socially optimal — and if not why. Another drawback is that there is inconsistency in application and a lack of comparability across studies. Inconsistency and incomparability is in part due to a lack of consensus about determinants of adaptive capacity (Adger et al., 2007). Finally, there is no recognition of interrelations between determinants and there is no systematic assessment to evaluate the optimal mix of determinants or analysis to identify where investment in particular determinants would yield the highest return. 2.2. Community capacity The community capacity approach is based on the notion that access to, and ownership of resources and assets enhance a community's general capacity to respond to sudden impacts and contribute to longterm community sustainability. The community capacity approach is also bottom-up in nature. Donoghue and Sturtevant (2007) assess various social science constructs of community capacity used recently in ecosystem assessments in the US. They find although there are areas of similarity, they vary in some fundamental ways. Beckley et al. (2002) describe an approach for assessment of community capacity. They define community capacity as “the collective ability of a group (or community) to combine various forms of capital within institutional and relational contexts to produce desired results or outcomes” (Beckley et al., 2002 p. 7) (see also Kusel, 2001). Forms of assets that contribute to community capacity include • Natural capital: natural resources and environmental services such as clean air and water • Human capital: skill, education, and health of individuals that contribute to the skill base and economic performance of the community • Economic capital: local industrial base, physical infrastructure such as roads and buildings, financial capital such as organizational budgets and household savings • Social capital: the relationships between and among community members that contribute to collective action Various authors allude to other forms of capital. For example, Flora and Emery (2006) include cultural and political capital as determinants of community capacity. Social scientists have also separately studied specific individual determinants of community capacity frameworks in considerable depth. For example, social capital is viewed as an important determinant of community capacity. Social capital refers to the interrelations and networks of individuals, organizations, and community leaders (Matthews, 2003). Networks are defined in terms of size, density, and diversity and they can take different forms (e.g. bonding, bridging, and linking) (Franke, 2005). Social capital provides individuals and groups with access to information and resources that they might not otherwise have access to. Thus, social capital contributes to the ability of individuals to deal with shocks and to adapt and adjust to change generally (Matthews, 2003; Franke, 2005) and to climate change in particular (Adger, 2003). Social capital also exists at higher levels. For example a community's collective social capital is measured in terms of numbers of organizations in a community, number of members in these organizations, and interrelations between organizations (Franke, 2005). Also, community leaders have social networks that may benefit the overall community. A high level of social capital in a community contributes to adaptive capacity because it supports collective action by the community. It also contributes to actions or decisions that contribute to overall community health and well-being. Perception of climate risk affects the willingness of individuals to adapt (McDaniels et al., 1996; O'Connor et al., 1999). Understanding perceptions of climate change risk contributes to vulnerability assessment in two ways. First, individual perceptions provide new information that complements technical risk assessments because such perceptions may be based on local observations that are too subtle to be reflected in technical risk assessments. Second, there are often features or characteristics of climate related risks and/or risk perceivers themselves (i.e. individuals, communities, or policy actors) that may result in differences between perceived risk and objective risk (Slovic, 1987; Slovic, 2000; McDaniels et al., 1995; Khaneman et al., 1982). Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003 ARTICLE IN PRESS T. Williamson et al. / Forest Policy and Economics xxx (2010) xxx–xxx Davidson et al. (2003), Stedman et al. (2004), and Williamson et al. (2005) consider these factors in the context of forest-based communities and forestry actors in Canada. Underestimation of risk may result insufficient adaptation and underinvestment in adaptive capacity causing individuals and communities to be relatively more vulnerable. Processes of adaptation and investment in adaptive capacity itself are controlled by institutional and organizational factors that determine how assets are generated and combined to produce various outcomes. Adaptation and investment in adaptive capacity can be enhanced or constrained by institutions (Adger and Kelly, 1999). Therefore, a potentially important contributing factor for climate change vulnerability assessments is the identification of weak, inefficient, or out of date institutions (Adger and Kelly, 1999). Institutions guide economic, social and political choice, and the behaviour of agents. They define property rights and responsibilities, and guide decisions by individuals, households, firms, government agencies, land-owners and organizations. In a climate change context, institutions provide the incentives, rules, mechanisms, tools, and means that will motivate and direct adaptation and investment in adaptive capacity. Institutions that are effective and efficient, and entitle individuals and groups to resources needed for adaptation, will contribute to the adaptive capacity. Conversely, institutions that do not optimally and efficiently provide individuals and groups with access to resources necessary for adaptation, and/or that do not provide sufficient autonomy to adapt in ways that are best suited to their particular requirements will constrain or reduce adaptive capacity (possibly at levels that are socially sub-optimal). The community capacity approach provides more structure and goes into more detail about the formation, use, and depreciation of the various determinants that contribute to adaptive capacity. It also directly refers to processes affecting the formation and utilization of adaptive capacity resources. The community capacity approach provides an enhanced understanding of adaptive capacity from the point of view of social processes and systems. As was the case with the general approach, there are some limiting aspects of the community capacity approach. First, there is a lack of a commonly agreed-to overarching definition of capacity in terms of which determinants to consider. The result is multiple competing viewpoints and approaches about what to include. A second general limitation is that it is not behavioural in that it does not consider how investment in adaptive capacity contributes to agent objective functions. Similar to the general approach, the community capacity approach is a bottom-up approach, and there is no criterion for determining adequacy of current adaptive capacity in a particular human system. 3. A behavioural approach The current constructs of adaptive capacity described in the previous section have a number of weaknesses including the potential for inconsistency across studies and absence of an overarching topdown framework that allows for consideration of the question: how much adaptive capacity is enough and when is adaptive capacity undersupplied? Addressing this question requires an approach that looks at human motivations for possessing, purchasing, and developing adaptive capacity and costs. It requires a behavioural approach. A behavioural approach starts with recognition that aggregate adaptive capacity derives from the purchase and possession of various adaptive capacity resources and assets. Adaptive capacity resources and assets are accumulated because they serve some function relative to an owner's goals and objectives. These assets are obtained by individuals, firms, and societies through a combination of purchasing, construction, time investment, inheritance, and redistribution. The assets may also depreciate over time with use or simply as a result of decay. The number and magnitude of adaptive capacity assets obtained and the particular mix of assets in the adaptive capacity basket is determined by individual and collective choices that are regulated, constrained, and influenced by rules, norms, standards, policies, regulations, institutions, markets, 3 customs, prices, costs, and incomes. If agents are rational and if allocation systems and resulting investments are efficient, then the existing adaptive capacity of an individual or a firm or a group or a society will be optimal. The aggregate adaptive capacity of an individual or firm or organized system can also be characterized by inherent properties and characteristics. These properties include liquidity of held assets, mobility, diversity, flexibility, efficiency, rigidity, and substitutability. These properties and characteristics influence (1) the responsiveness of a system to adapt in a timely way once a signal of adaptation requirement is revealed, and (2) the types of adaptations that a particular adaptive capacity configuration can support (e.g. in-situ adaptation vs. migration; physical adaptation vs. behavioural adaptation). Viewed in an economics general equilibrium context aggregate adaptive capacity (the output produced by combining individual adaptive capacity assets) can be regarded as a service that is produced and consumed along with other goods and services. Individuals and firms demand adaptive capacity because it contributes to utility, wellbeing, and the management objectives of firms. Societies demand and develop adaptive capacity because it has public good characteristics (and therefore tends to be undersupplied by private markets), and contributes to over all social well-being. Adaptive capacity producers (who are in some cases also the consumer) develop, create, and/or supply adaptive capacity. Agents jointly determine welfare maximizing levels of all goods and services (including adaptive capacity). Welfare is maximized where marginal benefit equals marginal cost for all goods and services and markets clear (i.e. supply equals demand). Therefore, if markets and institutions are efficient and producers and consumers are rational and well-informed, the levels of adaptive capacity that are expressed in households, firms, communities, economies, and regions will be socially optimal and in equilibrium. Given the above, different socio-economic systems will vary in equilibrium levels of adaptive capacity and in the amounts and configuration of assets that contribute to adaptive capacity. Differences in what is socially optimal might occur because of differences in (1) requirements, (2) preferences, (3) costs of obtaining, developing, purchasing, creating or maintaining adaptive capacity assets, (4) income, and (5) relative prices of adaptive capacity assets and all other goods and services. Various other factors affect adaptive capacity investment choices including scale of the system, remoteness, natural endowments, and isolation. Thus, there may be rational and justifiable reasons for differences in adaptive capacity between individuals, between firms, and between organized human systems. This is neither good nor bad. Moreover, it does not necessarily imply higher or lower vulnerability because if allocation mechanisms are efficient and agents are rational, climate change considerations in combination with all other factors will have been factored into decisions about adaptive capacity holdings. If, however, agents are irrational or if there are systematic barriers and failures in allocation mechanisms (be they market, social, or political in nature) that bias investment choices or restrict use of adaptive capacity, then there may be either underinvestment in particular adaptive capacity assets or underutilization of these assets resulting in adaptive capacity deficits and heightened vulnerability. A number of important conclusions that run contrary to current mainstream adaptive capacity constructs arise from the previous discussion. 1. Static adaptive capacity (at a particular point in time) is a function of assets (human capital, social capital, intellectual capital, infrastructure, knowledge, science capacity, information technology). Adaptive capacity investment is also affected by, or determined by exogenous factors such as requirements (current and expected future demand), preferences (including risk preferences), income, prices, cost, natural capital endowments, scale, remoteness, access, and isolation. 2. Adaptive capacity can also be characterized in terms of certain inherent properties (e.g. liquidity of held assets, mobility, diversity, Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003 ARTICLE IN PRESS 4 T. Williamson et al. / Forest Policy and Economics xxx (2010) xxx–xxx 3. 4. 5. 6. flexibility, responsiveness, efficiency, and substitutability) and the types of adaptation that can be supported (in-situ adaptation, relocation, physical change, behavioural change). As noted, income, financial resources, and natural capital are exogenous determinants of adaptive capacity. The goal of the decision maker is to purchase a basket of goods and services (which includes adaptive capacity assets) that maximizes agent well-being or utility given a certain income and other endowments. Income and endowments, therefore, do not define adaptive capacity. They do, however, influence the amounts of adaptive capacity assets and resources that can be obtained. This suggests that there is a distinction between what defines adaptive capacity and what determines adaptive capacity. Adaptive capacity is comprised of investable assets such as human capital, social capital, cultural capital, infrastructure, knowledge, scientific evidence, and intellectual capital. The magnitude of individual adaptive capacity assets held is determined or influenced by preferences, income, endowments, costs, relative prices, institutions, and other exogenous factors (scale, remoteness, isolation, etc.). Assuming rational agents and efficient allocation systems (economic, social, political, and information) there is some optimal (but likely unknown) level of adaptive capacity for individuals, firms, and human systems and an optimal mix of adaptive capacity assets that contribute to aggregate adaptive capacity. There is a hypothetical right amount of particular adaptive capacity assets for individuals, firms, and organized human systems and this amount will vary crosssectionally and over time. Differences in adaptive capacity between individuals or between organized human systems, therefore, are natural do not necessarily correlate to differences in vulnerability. The challenge for vulnerability analysis, therefore, is to determine where differences are normal and where differences are the result of biased decisions and choices. Adaptive capacity deficits are the result of irrational agent behaviour or system failures. The main consequence is the potential for underinvestment and underutilization of adaptive capacity assets. It is these factors that contribute to heightened vulnerability. A society may decide to redistribute resources and assets in order to enhance the aggregate adaptive capacity of a particular group. But this comes at the price of reduced aggregate adaptive capacity of some other group within society. 4. Factors contributing to adaptive capacity deficits Systematic analysis of factors contributing to adaptive capacity deficits extends beyond economics. An integrated, multi-disciplinary approach is required. A complete framework for assessing adaptive capacity deficits necessarily touches on economics, sociology, psychology, political science, geography, and law. There are four main categories of factors that may result in suboptimal investment in adaptive capacity: (1) market failure, (2) governance/institutional failure, (3) social system failure, and (4) information/knowledge gaps/irrational agent behaviour. Examples of causation factors within each of these categories are indicated below: Market/economic system failure • Imperfectly competitive markets • Sub-optimal supply of public goods (e.g. public infrastructure, health and social services, emergency services [fire, police, and ambulance], education, environmental protection and conservation) • Moral hazard and adverse selection (e.g. failing to take measures to reduce risks because of the knowledge or perception that risks are insured or that governments will reduce the risk or provide compensation) • Market rigidities (potentially indicated by below average low capacity utilization or high unemployment) • Tariffs and trade barriers • Subsidies and inefficient tax regimes Governance, institutional, and policy failure • Unjustified and economically inefficient policy and program interventions • Public supply of private goods • Undefined, unenforced, or attenuated property rights • Inefficient policies, programs, and regulations • Over-regulation or regulatory complexity • Adverse incentives • Policies, programs, regulations, and institutions that are nonresponsive, inflexible, and not forward looking or that fail to account for future climate change (e.g. policies that do not anticipate future climate change where it is justified and necessary to do so) • Absence of strong, dedicated, committed, competent, and effective leaders • Corruption and nepotism • Lack of transparency and accountability • Lack of autonomy and authority to invoke adaptation at relevant scales • Institutional factors that restrict movement and mobility Social system failure • Significant gender, race, cultural, class, religious, and other divisions within society • Presence of social conflict, disharmonious relations, • Closed social system, restricted freedom of movement and expression • Occurrence of human rights violations and discrimination • Lack of effective public consultations in decision making • Undemocratic policies and practices • Unequal access to food, water, shelter, health services, social services, and education within a society • Lawlessness, absence of justice, lack of enforcement, high rates of crime Information system failures and irrational agent behaviour • Significant science and knowledge gaps • Low science capacity of affected parties and inability to process complex climate impacts information • Asymmetric information and adverse selection (differences in information between people creates inefficiencies in market transactions and may inhibit collaboration and cooperation) • Lack of awareness about climate change impacts and risks • Lack of access to information, databases, tools, and frameworks to support vulnerability analysis and adaptation planning • Biased risk perceptions • Cognitive bias or distortion resulting in errors in judgement and choice The presence of the above factors (singularly or in combination) has the potential to produce socially sub-optimal investments in adaptive capacity resources and assets or restrict the effectiveness of adaptive capacity resources with the result that the system that is subject to the resulting biases and distortions will be more vulnerable than another system that is not subject to the same types of irrational choices and system failures. Some of the consequences of adaptive capacity deficits include: • Impaired capacity of economic agents to adapt to changes in current and expected future prices and costs • Low capacity utilization of man-made capital, underutilization of productive capacity of natural resources, and chronic unemployment • Insufficient budget allocation for adaptation and adaptive capacity resources • Biased signals of adaptation and adaptive capacity requirement • Reduced competitive pressure and reduced competitiveness of agents Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003 ARTICLE IN PRESS T. Williamson et al. / Forest Policy and Economics xxx (2010) xxx–xxx • Constrained adaptation and restrictions on use of existing capacity to adapt for individuals, firms, social systems, and governance systems • Irrational and biased choices about adaptive capacity and adaptation • Rigidity, inaction, lack of planning • Social dysfunction, disharmony, conflict, non-cooperation, low levels of interdependence, lack of integration, • Underinvestment in human capital, social capital, intellectual capital, infrastructure, science, and knowledge • Inequitable distribution of adaptive capacity resources and assets • Loss of trust in public institutions • Non-compliance with rules, social norms, regulations, and laws • Preventable uncertainty and development of information scarcities about future impacts • Lack of awareness, biased perceptions of risks, inability to utilize existing scientific information • Cognitive errors in evaluating impacts and adaptive responses 5. Assessing adaptive capacity deficits It is not possible to identify adaptive capacity deficits by comparing measured adaptive capacity against an adaptive capacity standard. Adaptive capacity is intangible and not directly measurable. It can be assumed, however, that if individuals are rational and if a system is functioning efficiently then adaptive capacity will be optimal. If, however, individuals or firms are exhibiting irrational behaviour in terms of responding to climate change, or if there is some system failure that is preventing optimal investment in adaptive capacity, or if system failures are in some ways restricting the effectiveness of existing adaptive capacity, then there is likely an adaptive capacity deficit that in some ways makes the system vulnerable. This section provides a series of steps for applying the concept of adaptive capacity deficit in the context of climate change vulnerability analysis. 5.1. Assessment issues There are a number of issues that make the assessment of adaptive capacity deficits challenging. First, as noted, adaptive capacity is intangible partly because it is composed of a number of intangibles (e.g. human capital, social capital, intellectual capital, creativity, knowledge, organizational capital). Second, the causes of adaptive capacity deficits are wide ranging. Their assessment touches on a range of disciplines including economics, sociology, psychology, political science, law, and human geography. An integrated, comprehensive, and multi-disciplinary approach is needed in order to assess adaptive capacity deficits. Third, evaluation of institutions and governance systems is vital but difficult. Decisions are based on complex interactions and trade-offs between multiple competing values. It is difficult to ascertain with certainty, therefore, if there is any kind of systematic failure in governance and institutions. 5.2. Assessing aggregate adaptive capacity The identification of adaptive capacity deficits starts by evaluating current adaptive capacity. However, as noted, aggregate adaptive capacity is an “intangible asset” and it is not directly measurable. In the economics literature, intangible assets include attributes such as skills, intellectual property, managerial quality, and other characteristics and qualities that confer benefits to consumers or producers but that are not directly measurable (Brynjolfsson et al., 2002). Adaptive capacity is similar. It is necessary, therefore, to make inferences about adaptive capacity. There are two ways to make inferences about aggregate adaptive capacity. One is to evaluate individual determinants (social capital, human capital, etc.). As discussed earlier, this bottom-up determinant based approach is used in the Intergovernmental Panel on Climate Change's Third and Fourth Assessment reports (see Smit and Pilifosova, 2001 and Adger et al., 2007). 5 An alternative approach is to infer levels of aggregate adaptive capacity using outcome proxies. All individuals and organized systems are subject to social, economic, and environmental change. If it can be assumed that adaptive capacity is correlated with social and economic outcomes then outcome indicators provide useful proxy indicators of the adaptive capacities of individual agents and of human systems. Systems with low adaptive capacity may be more prone to frequent large swings in the economy or in the local population. A system with low adaptive capacity may also display characteristics such as negative or below average economic growth, high unemployment (indicating labor markets are unable to clear), low per capita income, high poverty rates, low rate of capital investment, presence of significant conflicts, high crime rates, slow rates of recovery following shocks, and high infant mortality rates. However, the interpretation of these various indicators is not necessarily straightforward. For example a proxy indicator of current adaptive capacity could include percentage change in population between two periods. A declining population does not necessarily indicate low adaptive capacity. If population change results in a net improvement for the individuals and regions affected then adaptive capacity of the individuals and regions affected would seem to be strong. However, if the population is migrating and there is no net improvement in welfare, then adaptive capacity of individuals and regions may be low. 5.3. Analyzing adaptive capacity deficit potential Step two involves the analysis of populations and systems to identify if there are adaptive capacity deficits. As noted, the identification of adaptive capacity deficits cannot be achieved by comparing measured adaptive capacity to an adaptive capacity standard. The identification of potential deficit cases comes down to the identification of causation factors. As noted in the previous section the main categories of factors contributing to adaptive capacity deficits are: (1) market failure, (2) governance failure, (3) social system failure, and (4) information system failure and irrational agent behaviour. A number of specific potential causations are listed under each of the above categories in the previous section and will not be repeated here. Given the diverse suite of factors potentially contributing to adaptive capacity deficits, an integrated and multi-disciplinary approach is required. 5.4. Identification of consequences If adaptive capacity deficit causation factors are identified, the next step is to conduct a systematic assessment of the consequences. The consequence of an adaptive capacity deficit may be underinvestment in adaptive capacity assets, underutilization of adaptive capacity assets, or a socially inequitable distribution of determinants. Specific adaptive capacity assets (e.g. natural capital, human capital, social capital, intellectual capital, infrastructure, cultural capital) could be selectively considered for more detailed analysis and remedies provided. Recommendations about remedies would necessarily include identification of where social returns would be the highest. 5.5. The potential for emergent adaptive capacity deficits The final step is the identification of the potential for emergent adaptive capacity deficits. In some cases, the prime concern may not be in terms of current adaptive capacity but in terms of the potential for an adaptive capacity deficit to emerge in the foreseeable future. Individuals and organized systems may not be subject to current adaptive capacity deficits but may face the prospect of emergent deficits under future climate change. There are two main reasons why adaptive capacity deficits may emerge. First, if future outcomes differ from what people are expecting them to be, then systematic under and/or over investment might occur and adaptive capacity deficits may emerge. Second, climate change itself can have feedbacks on adaptive capacity. For example, Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003 ARTICLE IN PRESS 6 T. Williamson et al. / Forest Policy and Economics xxx (2010) xxx–xxx natural capital is considered to be a determining factor of adaptive capacity. However, climate change can increase or decrease natural capital. Therefore, climate change itself can contribute to adaptive capacity deficits and surpluses. 6. Adaptive capacity of economic systems The second area where economics can better inform current adaptive capacity constructs is by assessing factors or features that influence or affect the adaptive capacity of economic systems (Williamson et al., 2007). Existing constructs of adaptive capacity say very little about the role that higher-level economic system properties such as economic diversity might play in affecting the adaptive capacity of the socioeconomic system. However, diversity (as well as other properties such as flexibility) is an important characteristic of adaptive systems (e.g. see Gunderson and Holling, 2002). Individuals who reside in communities where the economy is dominated by a single industry or a single mill, for example, have fewer options and face higher adaptation costs (e.g. requirements to relocate) than individuals who reside and work in communities or regions with more diverse economies, particularly in cases where the primary resources that support the industry (or mill) are climate sensitive (such as the forest industry). Specialized labor skills associated with a particular industry may further reinforce this lack of employment mobility (Davidson et al., 2003). In some cases a long established dominant industry within a single industry resource-based town may have an aging workforce and older workers may have difficulty relocating to new industries in the new knowledge economy. The current constructs of adaptive capacity also say very little about scale as a determining factor of adaptive capacity. However, scale can have a large influence on the capacities of socio-economic systems, particularly given recent trends such as agglomeration of industrial capacity, globalization, and urbanization. Smaller communities may have a lower ability to attract new investment and new industries in cases where the current industry is in being downsized. In the case of the supply and demand of private goods and services, open and competitive free market economies have a higher capacity to adapt to change than closed, heavily regulated, and centrally planned economies. Competition provides a strong incentive and motivation for adaptation and ensures that agents are innovative and adaptive. Competitive free market economic systems are adaptive in the sense of being responsive and flexible. Moreover, decisions about resource use and allocation occur autonomously in response to market signals as opposed to relying on bureaucratic central planning, government ownership, regulation, and or tax policy. There may, therefore, be opportunities to increase adaptive capacity by reducing public intervention in private good allocation (e.g. reducing subsidies and tax incentives/penalties, reducing public ownership, reducing regulation) (Luckert and Williamson, 2005). At the same time, private markets are inefficient relative to the optimal provision of public goods and common property goods and so for cases where adaptive capacity requirements increase relative to potential threats to public goods, an increase in public interventions may be warranted. Here again, economics can play a role in determining where increased private markets can have a positive effect on adaptive capacity and where there is a need for more intervention and regulation. Moreover, interventions may be necessary where there is a need for redistribution of adaptive capacity. The need for redistributing income to address inequities in the distribution of adaptive capacity is a social policy question. Nonetheless, economics can inform decision making by identifying opportunity costs and the most efficient way to redistribute adaptive capacity to more equitable levels across systems. From an economics perspective adaptive capacity can be viewed as a function of factor inputs (i.e. determinants) where the functional relationship between adaptive capacity and inputs is defined by some type of underlying (but unknown) production function. Some factors may be complementary and some may be substitutes. Some factors contributing to the production of adaptive capacity may be easily substituted (i.e. there is a relatively high elasticity of substitution) and for others it may be difficult to substitute inputs (i.e. there is a relatively low elasticity of substitution). In the short term, business decisions of firms are constrained by the fact that some inputs (such as a firm's capital stock) are fixed. The fixed nature of some inputs means that options for adaptation in the short run are limited. In the long term, all inputs (including capital) are variable and a different set of adaptation strategies might be possible. Thus, in assessing the adaptive capacity of firms and economies it may be useful to differentiate between the short run and long run. In the long run, firms may respond to reduced prices and/or changes in resource costs and availability by shutting down and/or relocating, increasing plant size (assuming economies of scale exist), investing in new technologies, changing input proportions (i.e. substitution). The differentiation between short-run adaptive capacity (where some determinants are relatively fixed) and long-run adaptive capacity (where all determinants are variable) may also be an extension worthy of further consideration in assessing the adaptive capacity of local economies. For example, in the short run some factors and properties that affect adaptive capacity of economies and social systems are relatively fixed (e.g. fixed infrastructure assets, structure and degree of diversity of the local economy, size, remoteness, natural capital). Other factors (such as human capital, social capital, political capital, cultural capital, etc.) might be considered as variable in the sense that individuals (and communities) have an opportunity to change the levels of these determinants in the short run. 7. Summary and conclusions There are a variety of ways that economics can contribute to how adaptive capacity is defined, interpreted, and utilized. First, economic theory and concepts have the potential to provide structure and an integrating framework for adaptive capacity analysis. For example the general equilibrium/behavioural construct is a top-down approach that provides for a more consistent, objective, and policy-relevant interpretation of adaptive capacity. Subjective assessments of adaptive capacity based only on the presence and abundance of particular adaptive capacity assets are necessary but not sufficient. The assessment of current and/or potential future adaptive capacity deficits complements the determinant based approaches and reduces some of ambiguity inherent in these approaches. A second improvement from economics is to introduce properties such as scale, economic diversity, substitutability, remoteness, and isolation into methods as well as approaches for assessment of adaptive capacity. A third improvement is to explicitly assess the structure of the local economy in terms of whether the current mix of private markets and public interventions is appropriate given climate change. Market-based systems are the most efficient mechanism for reallocation of private goods and services under climate change. There may, however, also be social costs and externalities associated with markets. Consequently, the relative efficiency and effectiveness of private sector and public institutions in adapting to impacts on non-private goods and services is an important factor. 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Please cite this article as: Williamson, T., et al., Adaptive capacity deficits and adaptive capacity of economic systems in climate change vulnerability assessment, Forest Policy and Economics (2010), doi:10.1016/j.forpol.2010.04.003