Government as a “Foe” and “Friend” of Climate Change Adaptation

The New York Times has recently reported that the U.S government has invested billions of dollars in new levees to protect New Orleans from flooding. Do such placed based subsidies help us to adapt to climate change?

On one level, the answer is obviously “yes”. This investment lowers the probability that the geographical area called New Orleans floods. But, economists always question the conventional wisdom. For decades, economists have studied the “crowd out” effect. Just as the introduction of Social Security reduces individual’s private savings for retirement, a benevolent government’s new sea walls around a city can put more people at risk! An unintended consequence of households trusting the new sea walls is that it can induce more people into living in a coastal city. A cold hearted government that could pre-commit to make no investment in such infrastructure could potentially protect more people as citizens would take actions to protect themselves (i.e migrate away from coastal cities). I acknowledge that this is not a nuanced example but when evaluating the benefits of government policy we must think through how locational choices by households and firms are affected by the well intentioned government policy.

A second path through which government can hinder adaptation is through blocking free market price increases. An example is allowing insurance companies to engage in “price gouging”. For profit insurance companies could play a crucial role in helping us to adapt to climate change. If they are allowed to price discriminate and charge risk based prices for premiums then this will send strong signals to households and firms concerning which parcels of land should be avoided due to increased climate change risk. To give a concrete example, suppose that in the absence of climate change an area had a 1 in 1000 chance of suffering flood damage but now due to climate change the probability of this event is 1 in 100. If the insurance industry is a competitive industry, then premiums will need to rise 10 times to allow the insurance companies to break even in the face of climate change.

To a politician who does not believe in climate change science, this 10 times increase in premiums will look like simple “price gouging”. Such politicians will attempt to score points with voters by trying to block this. Economists will counter that if the insurance company was earning abnormally high profits then this would trigger entry and the premium prices would fall due to competition. While I believe this economic logic, I don’t expect that the politicians will. Allowing prices to float takes political courage. We will see if politicians allow water prices to rise and electricity prices to rise in areas where resources grow increasingly scarce. If politicians attempt to protect consumers by setting artificially low prices then this will discourage conservation and hinder the adaptation push.

This blog post has focused on government as “foe”. There are ways in which government can accelerate adaptation efforts. Government is a trusted source of information provision. In California, Spare the Air Smog Alert days represent a form of information regulation. The authorities announce them a day ahead of time and this provides useful information for households as they decide how much time to spend outside the next day. Matthew Neidell has conducted innovative empirical work documenting that households do change their behavior when informed about the upcoming public health threat. His empirical work examinrd trends in Los Angeles Zoo attendance. The Los Angeles Zoo is located in a smoggy part of the city. Daily attendance falls on Spare the Air days as compared to roughly equally smoggy days that were not smoggy enough to trigger a Smog Alert announcement. This discontinuity research design allows him to establish the role that the announcement (rather than simply the objective air pollution level) plays in changing household behavior. If climate scientists can forecast upcoming heat waves and the government can spread this information, then we can optimistic that households will alter their day to day behavior to protect themselves from heat wave and pollution exposure. Government can also use its zoning powers to require new residential and commercial real estate to meet more stringent building codes to comply with likely climate risks.

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