Monday, October 20, 2014

Costs and Consequences of Climate Change: Land Use Climate Change Bubbles: Part II

The following is excerpted from Land Use and Climate Change Bubbles: Resilience, Retreat, and Due Diligence by Prof. John R. Nolon.  For the first post on this topic, click here.

“The financial crisis of…2008 was not a single event but a series of crises that rippled through the financial system and, ultimately, the economy.”[1] “Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted.”[2]

Similarly, Land Use Climate Bubbles are emerging in every region of the country that should rivet the attention of policy makers. In numerous communities, property values are declining because of repeated flooding, continued threats of storm surges, sustained high temperatures, constant fear of wildfires, the lack of water in residential, commercial, and agricultural areas, and real concerns with mudslides in vulnerable areas. This persuasive evidence that local economic bubbles are forming is reinforced by a variety of recent and persuasive reports at the national and international level. 

GAO High Risk List

The heightened cost to the federal government of climate change is evidenced by the addition in 2013 of climate change to the Governmental Accountability Office’s (GAO) list of issues that pose the greatest threat to the U.S.[3] In doing so, the GAO recognized that climate change threatens to inflict huge costs to the U.S. taxpayer, including damage to physical infrastructure, increased insurance liability, and disaster relief. The addition of climate change to the GAO’s High Risk list demonstrates the serious financial risk that climate change poses and sharpens the focus on the threat that it entails to public health, the environment, and the economy.[4]

National Climate Assessment[5]

According to the May, 2014 National Climate Assessment, “[c]limate change, once considered an issue for a distant future, has moved firmly into the present.” [6] The study, was prepared by a large scientific panel overseen by the government and concluded that the effects of climate change are being experienced throughout the United States, and have been primarily caused by human activities over the last fifty years.[7]  The report specifically mentions water growing scarcer in dry regions, torrential rains increasing in wet regions, heat waves becoming more common and more severe, wildfires growing worse, and forests dying under assault from heat-loving insects.

The report noted that U.S. average temperature increased by 1.3°F to 1.9°F since record keeping began in 1895 and that most of that increase occurred since about 1970.[8] In addition, the panel reported if the U.S. continues its current GHG emissions path, the temperature could increase by 8-11°F by 2100.[9] This increase in temperature has caused many immediate effects that will only be exacerbated in the decades to come, including shorter duration of ice on lakes and rivers; reduced glacier extent; earlier melting of snowpack; reduced lake levels due to increased evaporation; lengthening of the growing season; changes in plant hardiness zones; increased humidity; rising ocean temperatures; rising sea level; ocean acidification; and extreme weather patterns, including the increased severity of winter storms, heat waves, floods, and droughts, as well as the increased magnitude and frequency of hurricanes in the North Atlantic.

Risky Business in the Private Sector

The economic risks of climate change to the private sector were the topic of a report issued in June, 2014 by Risky Business, a joint initiative of Bloomberg Philanthropies, the Office of Hank Paulson, and Next Generation.[10] The Risky Business project frames climate change in economic terms, attempting to provide a “common language for how to think about climate risk.” This project supports an independent economic analysis to quantify the range of likely costs of climate-driven impacts on everyday weather, natural disasters, and the economy of nine regions of the U.S. It is essentially a call to action for American businesses to react on a national scale.

The report focused on both the short-term and long-term economic impacts that sea level rise, rising temperatures, and snowmelt will have on coastal infrastructure, agriculture, and energy consumption, as well as public health and labor productivity.[11] The report found, “[i]f we continue on our current path, by 2050 between $66 to $106 billion worth of existing coastal property will likely be below sea level nationwide, growing to $238 to $507 billion by 2100.[12] In addition, it concluded, “absent agricultural adaptation…national commodity crop production (corn, soy, wheat, and cotton) could decline by 14 percent by mid-century and by up to 42 percent by late century” as extreme heat spreads across the middle of the country. In all, these findings “underscore the reality that if we stay on our current emissions path, our climate risks will multiply and accumulate as the decades tick by.”[13]          

Real Estate and the Land Use Climate Change Bubble

Climate change creates serious risk in the real estate market and real estate investors, insurers, and mortgagees are risk averse. Risks, once perceived by this market, slow the pace of sales, lower property values, increase the cost of insurance, and limit the availability of financing. The biggest economic threats of climate change, in fact, are to the real estate industry.[14]  In some vulnerable areas, casualty insurance rates have increased by over seventy-five percent.[15]

Climate change factors such as extreme weather, sea level rise, coastal erosion, floods and wildfires are projected to cause some $300 million to $3.9 billion in California real estate losses annually. It’s a huge range, due to uncertainty in climate models, impacts and adaptation, and that uncertainty makes insurers even more nervous, because they’re not quite sure what to prepare for. What we do know for sure is that California alone has $2.5 trillion in real estate assets at risk for climate change damage. That’s approximately 135 percent of the state’s annual gross domestic product! Insurers have already begun cancelling homeowners’ policies in high-risk areas and raising insurance costs in potentially impacted locations. In the San Francisco Bay Area, for example, most high value bayside property will be inundated if the sea level rises just one meter—well within the range of conservative scientific projections.[16]

Given the impact on the housing bubble on the nation’s economy, it is painfully clear that the bursting of Land Use Climate Bubbles in all regions of the country will have catastrophic economic ripple effects. If we do not see and respond to the warning signals, the consequences could easily dwarf those of the 2008 collapse of the housing market.

John R. Nolon 



[1] Fin. Crisis Inquiry Comm’n, The Fin. Crisis Inquiry Report: Final Rep. of the Nat’l Commission on the Causes of the Fin. and Econ. Crisis in the U.S. 354 (2011), at 27.

[2] Id. at  xvii.

[3] U.S. Gov’t Accountability Office, High Risk Series: An Update 15 (2013), available at http://www.gao.gov/assets/660/652133.pdf.

[4] Id.; see also Thomas L. Friedman, Obama on Obama on Climate, N.Y. Times (June 7, 2014), http://www.nytimes.com/2014/06/08/opinion/sunday/friedman-obama-on-obama-on-climate.html (Quoting President Obama, “[w]ildfires are ‘now consuming a larger and larger portion of the Department of Interior budget. And if we continue to fund fighting fires in the same way we’ve done in the past, all the money for everything else – for conservation, for maintenance of forests -- all that money gets used up.’”). 

[5] U.S. Nat’l Climate Assessment, supra note 7, at iv (“A team of more than 300 experts guided by a 60-member Federal Advisory Committee produced the report, which was extensively reviewed by the public and experts, including federal agencies and a panel of the National Academy of Sciences.”).

[6] Id. at 1-4.

[7] Id. at 3, 20. This report was the result of the Global Change Research Act of 1990, which requires the U.S. Global Climate Research Program (USGCRP) to prepare and submit an assessment of effects of global change in the U.S. to the President and Congress every four years. The USGCRP is made up of thirteen federal agencies and departments, including the Department of Agriculture, Department of Commerce, Department of Defense, Department of Transportation, and the Environmental Protection Agency. 

[8] Id. at 19-20.

[9] Id. at 26.

[10] A Climate Risk Assessment for the U.S., Risky Business, supra note 11, at 48.  These groups commissioned the Rhodium Group, an economic research firm that specializes in analyzing disruptive global trends, to complete this report. Rhodium then convened a research team, co-led by climate scientist Dr. Robert Kopp and economist Dr. Solomon Hsiang, and partnered with Risk Management Solutions, the world’s largest catastrophe-modeling company for insurance and investment management companies. An independent Expert Review Panel composed of leading climate scientists and economists reviewed their work, including its methodology and statistics.

[11] Id.

[12] Id.at 4.

[13] Id.

[14] Kelly Coplin, How Climate Change Will Affect Home Value: Essential Answer, Stan. Mag. (Sept./Oct. 2009), https://alumni.stanford.edu/get/page/magazine/article/?article_id=30265.

[15] Id.

[16] Id.; see also Climate Cent., Washington, D.C. and the Surging Sea: A Vulnerability Assessment with Projections for Sea Level Rise and Coastal Flood Risk 15 (2014), available at http://sealevel.climatecentral.org/uploads/ssrf/DC-Report.pdf (“We find that in Washington D.C., some $4.6 billion in property value – half in the zip code of 20024 (a large portion of Southwest DC) – and more than 1,400 people in 400 homes sit on land less than 6 feet above the local high tide line. At 10 feet the totals increase to $9 billion and 4,833 people residing in 1,900 homes.”).

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