Trillions have become the new billions, especially when it comes to climate policy. The Biden administration plans to spend $2 trillion to fight climate change. Yet, the Proceeding of the National Academy of Sciences concludes that climate change resulting from an increase in carbon dioxide concentration is “largely irreversible for 1000 years.”
Spending trillions may sound like we are really doing something, but these dollars are being thrown into the wind, pun intended, for three reasons:
1) If every country that signs onto the Paris Accord fulfilled its promise, Bjorn Lomborg estimates in a peer reviewed paper in Climate Policy that global temperatures will be reduced by a mere 0.048 degree Celsius by 2100.
2) There is not a chance that countries like China and India will meet their commitments.
3) The climate change train has left the station and can’t be stopped in the near future.
If trillions won’t stop storm surges from destroying beach front property, wildfires from engulfing millions of acres, seasonal precipitation from becoming more variable, what are we to do? The answer is to adapt to climate change, something humans have been doing since we first climbed out of trees.
We can build sea walls as the Dutch did hundreds of years ago. We can stop building in the path of climate change’s effects. And we can harness financial markets to reduce the effects of climate variance.
Anthropologist and lawyer, Barrett Ristroph, provides a wonderful description of how Alaska Natives have adapted. As she dozed off while spending a cold 2019 night with an Alaska Native family on the Koyukok River, her hosts pulled their subsistence fishing nets from the freezing river. “In past years, the river would have frozen over months before. But with climate change, everything is different. … In the morning everything is frozen. The nets have come out just in time.” They have adapted.
When humans see opportunities, they seize them, and when they see threats, they avoid them. Such adaptation requires information and knowledge to fuel incentives.
With more and better information on what is happening to climate and what the consequences are, asset owners, financial institutions, and risk arbitrators can incorporate that information into prices — for example, housing prices, mortgages and insurance rates — to incentivize people to prefer higher ground. Two recent studies estimate that storm surges and hurricanes could reduce beach front housing values by $30 billion to $50 billion by 2050.
Financial markets are working to spread risk due to climate. For example, the public water utility for Washington, D.C., had used environmental impact bonds to raise private capital to fund green infrastructure projects. In “Adapt and Be Adept,” economists Greg Characklis, Ben Foster and Matthew Kahn explain that these bonds “shift some performance risk to investors, protecting DC Water financially if the projects do not generate a certain level of reduction in combined sewer overflows.”
Similarly, forest resilience bonds (FRB) are used to fund forest management that can reduce the risk of wildfires. These bonds raise private capital to fund the upfront costs of forest management. On the North Yuba River in California, a FRB was used to actively manage 15,000 acres using prescribed burns, thinning, and meadow restoration.
Pricing risk to reflect climate variance, however, requires that government programs don’t distort risk signals through subsidies. A recent article in the journal Climate Change Economics estimated that there are 8.1 percent more houses in Allegheny County, Pennsylvania near Pittsburgh than there would be if insurance premiums reflected the true risk of flooding.
The Federal Crop Insurance Programs distorts risk decisions for farmers by subsidizing insurance programs. According to Vincent Smith, an agricultural economist at Montana State University, “The current U.S. crop insurance program encourages farmers to adopt production practices that will not be sustainable in the face of climate change, and in the short term contribute to greenhouse gas emissions.”
On the brighter side, California “Fair Access to Insurance Requirements” (FAIR) pools high-risk properties and insures them as a last resort. The companies that insure the program are statutorily required to be actuarially sound. Applying this requirement to federal crop insurance or flood insurance programs would provide more incentive to adapt to climate change.
In her book, “The Invaders,” anthropologist Pat Shipman concludes that Neanderthal man survived many periods of abrupt climate change. If they could adapt then surely we can, too, as long as the government provides better information about climate change and does not distort risk prices.
Terry L. Anderson is a senior fellow at the Hoover Institution and editor of the new Hoover Institution Press book “Adapt and Be Adept.”