The Moral Hazards of Climate Policy

Usually when the government publishes a new economic report, we break out our eye masks and catch some Z’s. But this time they dedicated a whole chapter to climate issues, so we couldn’t stay away.

What happened: The US government published its annual Economic Report of the President last week, outlining the Federal administration’s perspective on several key economic issues facing the United States. Sandwiched between crypto and labour shortages was an entire chapter dedicated to a climate-economics: Opportunities for Better Managing Weather Risk in the Changing Climate.

We read it, so you didn’t have to.

When it comes to climate change adaptation, US policies create economic “moral hazards”

Background: A moral hazard is when a person or institution lacks a reason to avoid risks, knowing someone else bears the costs of those risks.

• Just ask the airline industry, they’re the MVPs of bailouts.

In the case of climate risks, when local communities and state governments develop new areas for businesses and homes, they reap the benefits of increased taxes and economic activity. Yet, when a natural disaster strikes, the Federal Government steps in and foots the bill.

• If a developer knows that the costs of natural disasters are going to be covered by the government, are they going to think twice about building that gated community where July is referred to as “fire season”?

The big question: Should the Government continue to backstop risky climate adaptation behaviour?

US communities most at risk to natural hazards

Not only do the Feds respond to natural disasters like fighting wildfires, but they also subsidize crop insurance and almost all flood insurance across the US, distorting the actual costs of living and working in risky areas.

Increasing costs: The government points out that as climate change makes natural disasters more intense and more frequent, the financial costs of disaster response will rise. To limit growing costs, many are suggesting we rethink the support provided by the Feds, or even ban people building and living in high-risk areas.

The costs area already pretty high: 
 

Billion-dollar weather and climate disaster costs, 1980-2022
CPI adjusted USD

Free to make bad choices: The only thing Americans value more than freedom, is more freedom. Being told by the government not to build a beachfront property in Hurricane Alley or lose government-backed property insurance may not fly.

• It’s unlikely that the political will to roll back disaster and insurance support programs or to block new building will exist any time soon.

On the other hand, if the government stops paying for natural disaster insurance, they may finally convince people to move to Idaho.

Bottom line: Bad decisions or not, one of the roles of government is to help people out when they need it most. Climate adaptation isn’t as easy as just telling climate-vulnerable communities to pick up and move somewhere else.

But as the government points out, without some change in the way climate risks are managed today, the financial burden will only continue to increase.

+Bonus Reading:Climate Change Could Upend Federal Spending Programs

+Bonus Listening: Should the Government Pay for Your Bad Climate Decisions?