In 2014, several years after Treasury Secretary Hank Paulson left government, a group of economists asked him how he talked to his fellow Republicans about climate change. Paulson served under President George W. Bush and remains one of the few prominent Republicans to come out strongly in favor of action to cut carbon emissions. At first, the former secretary demurred, saying that he didn’t like to talk about politics. But then he opened up.
As climate disasters keep wreaking havoc on communities, Paulson explained, politicians will face enormous pressure to engage in “climate bailouts.” Bailing out bankers is never popular, but climate bailouts—using federal taxpayer dollars to rescue communities hit by extreme weather events—are very popular. No politician who wants a future in politics can afford to turn his or her back on disaster-ravaged communities. So, Republicans can choose: Control climate change and keep government limited in size or ignore the problem and watch government grow ever larger, with federal spending ballooning to pay for growing climate-related damage. As the 2019 hurricane season comes to a close while fires still rage in California, it’s time to reflect on Paulson’s comments.
Warning: Climate Bailouts Ahead
Already, the cost to the federal government from climate-related damages is significant. Congress appropriated almost $130 billion to pay for damages from Hurricanes Katrina, Rita, and Wilma in 2005. Another $50 billion in federal aid followed Hurricane Sandy in 2012. And five years later, following devastating wildfires and Hurricanes Harvey, Maria, and Irma, Congress authorized nearly $140 billion in emergency aid. The government borrowed most of this money, adding to the growing national debt and weakening America’s already deteriorating fiscal health.
The costs show no sign of slowing down. In the month of October alone, FEMA provided California federal support close to a dozen times. When wildfires hit California in 2018, President Donald Trump threatened to cut off aid to the state on the grounds that it had failed to reduce fire risk in its forests. But that threat quickly evaporated in the face of political outcry from both Republicans and Democrats, with Senator Lindsay Graham (R-SC) promising that “California will receive the money they need.” As extreme events become more intense and more frequent, battered communities will demand climate bailouts far more frequently.
At the same time, government—which is to say, the taxpaying public—will be left holding the bag, especially as private insurers pull back from markets that become too risky to insure. This has already happened in the case of floods. In the ’60s, a series of floods caused insurance companies to shy away from selling flood insurance in certain parts of the country because they viewed it as too risky. In response, in 1968 Congress created the National Flood Insurance Program (NFIP) to provide affordable insurance to communities facing significant flood risk and reduce the need for post-disaster federal aid. The NFIP is now the primary flood insurer in the country.
Today, the NFIP is also tens of billions of dollars in debt to the Treasury, largely because it charges less for insurance premiums than what it pays out in insurance claims. About 20 percent of properties insured, typically those in risky floodplains, receive subsidized insurance, transferring the risk to the government and reducing incentives for homeowners to move to safer ground or to invest in resilience. The program also continues to provide insurance to homes that have repeatedly flooded. Because the NFIP rates do not reflect actual risk, the NFIP is now over $20 billion in the red. Congress tried to fix the flood insurance program in 2012 by mandating that it charge actuarially sound rates, but political backlash forced a rapid retreat. The NFIP reform did not provide enough time and support for at-risk households to adjust to the increased costs.
As California burns, the danger is that we will replicate the same story with wildfires. Private insurers are refusing to write insurance policies for areas at high risk of wildfire. Political pressure will mount for the government to take on more of the risk through government subsidizes for at-risk properties. If the government creates another NFIP for wildfire, taxpayers may be forced to cover billions in private wildfire losses. This pattern of payouts by the federal government is the reason the Government Accountability Office, a government watchdog agency that works for Congress, has identified climate change as “a significant financial risk to the federal government.”
Over time, the costs of floods, wildfires, and other climate impacts will weigh down on federal, state, and local government budgets, displacing spending on other priorities, such as health, education, and cutting carbon emissions in the first place. It’s time that the federal government starts directing more money to reducing risk before disasters and encouraging communities to focus on making wiser choices to protect themselves.
A Better Way
There’s a better, smarter, and more financially sustainable way to tackle the impacts of climate change. To start, we need to keep cutting carbon emissions. Ultimately, that is the only action that can limit the damage. The United States must rejoin the Paris Agreement, restore policies from the Obama years aimed at reducing greenhouse gasses, and adopt even more ambitious targets and policies. At the same time, U.S. leadership to push and inspire other countries to do the same remains indispensable.
Second, the United States needs to spend much more time, money, and effort in preparing communities to build resilience before disaster strikes. Evidence is piling up demonstrating that this is a no-brainer.
A frequently cited 2005 review of several thousand U.S. government-funded projects designed to reduce the risk of damage from natural disasters concluded that a dollar spent on these investments saves society an average of four dollars. A 2017 update to that study revised the number upward, to six dollars in savings for every dollar deployed for resilience. The federal government therefore should expand grants for state and local governments to retrofit key infrastructure and improve communities’ access to data, modeling tools, and early-warning systems, so they can better prepare.
Congress took a modest step towards greater risk reduction in the Disaster Recovery Reform Act of 2018. The legislation requires that 6 percent of disaster assistance money provided by the Federal Emergency Management Agency pay for pre-disaster risk mitigation. Given the accelerating threat and damages, Congress must ensure that much more money flows to risk reduction before disaster strikes.
Third, we need to change where and how we build. Consider the case of wildfire. In 2008, California enacted a landmark building code establishing new fire-proofing standards for new construction in fire-prone areas. The new code calls for fire-resistant roofs, siding, and defensible space around the structure. Buildings built to the new code have fared significantly better than older homes built to lower standards. Yet these standards are not enough. Homes built to the new code are safer than older structures, but what will happen to those homes when wildfires worsen because of climate change?
In some places, developers are doubling down on taking more climate risk. California continues to add more homes to areas already deemed at high risk under current conditions. Just days after the Camp Fire, which was then the deadliest and most destructive fire in California's history, Los Angeles County approved the construction of 19,000 houses in an area that, according to the state's own analysis, already faced "high" or "very high" fire risk, even without considering climate change. This accumulation of risk needs to stop, especially if the public sector will ultimately be expected to cover some of the private losses.
Finally, Congress needs to tackle the thorny issue of the appropriate role of government in shouldering risk from climate-related disasters and incentivizing resilience and preparedness. Congress should move again to strengthen the NFIP, but this time do it right. It should phase out the subsidies over an adequate transition period and provide sufficient assistance to affected homeowners, especially low-income households.
At the same time, Congress should also make federal aid for recovery contingent on the level of investment communities have taken in advance of the event to reduce risk. Communities that have restricted building in at-risk areas and enforced stricter building codes would be eligible for higher disaster recovery funding. Those that permit new development in risky areas or fail to adopt strong building codes would see assistance decline over time. Congress should also tie levels of disaster recovery funding to the level of planning communities done to build back better, with greater resilience to climate extremes. Where Congress provides federal taxpayer funds to build new infrastructure, it should require that the siting and construction reasonably protect it against climate-fueled disasters.
All of these measures, at their core, will protect federal taxpayer investments. They will in turn help communities make wiser choices so that when they do rebuild after a disaster it won’t be the next wildfire or flood that wipes out all they have just rebuilt. We should expect nothing less of ourselves or our government.