Climate Change and Management of Catastrophic Risk

Abstract

Climate change will increase the probability of extreme weather conditions leading to catastrophic income shortfalls. National governments need to review past interventions and develop innovative ways to assist rural communities in coping with, and recovering from, massive and large income reductions. This chapter illustrates some common problems in policy interventions with respect to crop insurance, credit provisioning, feed subsidies and emergency relief. They usually increase household dependence on government assistance and incite households to accept larger risks than necessary and reduce own efforts to manage income risks. In addition, they cause moral hazard problems and are ineffective in reaching the poorer households. This chapter proposes two promising alternative instruments for risk management. First, income insurance based on local rainfall conditions overcomes the problems of the previous policy interventions, is relatively easy to administer and can be implemented by the private sector. Second, early warning drought forecasts guide farmers as well as governments in anticipating disastrous weather conditions.