CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENT
positive effects, reducing yields and increasing uncertainty for producers (Melillo et al., 2014; Marshall et al., 2015).
The Federal Government provides subsidized crop insurance to American producers to cover yield and revenue losses due to natural causes (weather, fire, disease, and wildlife) and market price changes. In 2015, more than 1.2 million individual policies were issued. These policies covered more than 120 crops across nearly 300 million acres, for a total Federal liability of more than $102 billion. Three crops—corn, soybeans, and wheat—account for two-thirds of insured acres and roughly three-quarters of total premium costs. By law, crop insurance premiums must be “actuarially fair”—calibrated to match the value of total expected losses on insured acres. However, the Federal Government currently pays for almost two-thirds of crop insurance premiums on average, at a cost of more than $6 billion in 2015.
Climate-related production shocks like drought are the dominant driver of crop insurance program indemnities (Wallander et al. 2013). Climate change could affect the Federal Government’s crop insurance subsidy costs in a number of ways—most clearly by increasing the riskiness of crop production due to the impacts of shifting weather patterns and climate disruptions on yield, or the impacts of climate-related production challenges at home and abroad on crop price volatility. However, in some instances crop vulnerability could also decline due to the physiological response of crops to higher CO2 levels. Mean production levels could also increase or decrease, affecting the total liabilities covered by the crop insurance program.
Risk Assessment
Modeling conducted by the USDA Economic Research Service (ERS) for this assessment indicates that unmitigated climate change[1] could increase annual crop insurance premium subsidy costs for corn, soybeans, and wheat by 40 percent by 2080 compared to a projected reference scenario characterized by historical weather patterns. This estimate is the average premium subsidy increase across the five GCMs used by USDA for the assessment. It assumes the average portion of total premiums paid by the government does not change over time, which implies that current law and current average coverage rates are both held constant. In a mitigation scenario that assumes some GHG reductions, the average projected cost increase for the crop insurance program across the five GCMs is about 23 percent.
The absolute fiscal impact of such an increase will depend largely on the total liabilities insured by the program in 2080, a product of future trends in agricultural productivity and global crop demand. In the 2080 “no climate change” reference scenario, the gross revenue for corn, soybeans, and wheat is $223 billion, compared to $122 billion in 2012. This modeling baseline is consistent with an annual growth rate of approximately 1 percent for both crop yields and demand.[2] In the 2080 reference scenario, the total premium subsidy for these crops is $10.6 billion, which, relative to the $5.4 billion actual subsidy in 2012, mirrors the increase in total revenue.
Given this baseline, the fiscal impact of modeled increases in premium subsidies would be $4.2 billion each year in the unmitigated climate change scenario, the equivalent of approximately $1.0 billion each year in today’s economy. Three of the five GCMs produce estimated increases between $2.4 billion and
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- ↑ The unmitigated climate change scenario modeled is the IPCC’s Representative Concentration Pathway (RCP) 8.5, in which emissions continue to rise throughout the century, causing radiative forcing to increase by 8.5 W/m2 relative to preindustrial levels. The mitigation scenario modeled is RCP 4.5, in which emissions peak around 2040 and then decline.
- ↑ Note this baseline is a projection for modeling purposes only and is not an official forecast.
