Climate Change: The Fiscal Risks Facing The Federal Government/Coastal Storm Disaster Relief

by Office of Management and Budget

4. COASTAL STORM DISASTER RELIEF

---

Modeling by the Congressional Budget Office (CBO) suggests the Federal Government could incur additional disaster relief expenditures of tens of billions each year by 2075 due to higher sea levels and more intense hurricanes caused by climate change.

---

Climate Change and Disaster Relief

When a storm devastates a community, the Federal Government responds. Discretionary spending to provide relief in the aftermath of coastal hurricanes has exceeded $200 billion since 2000 (CBO, 2016). Climate change is driving sea level rise and more intense hurricanes, amplifying the probability of catastrophic storm damages each year in America’s coastal communities and posing a significant fiscal risk for the Federal Government (Melillo et al., 2014; CBO, 2016).

A CBO study estimated that total expected economic damages^[1] would be roughly $120 billion higher per year in real dollars by 2075 compared to today, or roughly 0.18 percent of 2075 real GDP (Congressional Budget Office, 2016). The study shows that, assuming population and incomes continue to grow in coastal communities, climate change contributes roughly two-thirds of the modeled increase in expected hurricane damages, or about $80 billion per year by 2075. About half of this climate change-attributed increase is essentially the effect of climate change on existing coastal property, and half is the effect of climate change on expected future development in coastal communities. The remaining one-third of the total increase ($40 billion) would occur due to continued coastal development alone, holding current sea levels and hurricane frequency constant.

Risk Assessment

Based on CBO modeling of hurricane damages and associated Federal aid, the expected Federal fiscal burden attributable to the effect of climate change on expected hurricane damages is $19 billion per year by 2050 and $50 billion per year by 2075—or the equivalent in today’s economy of approximately $8.7 billion and $13.6 billion, respectively. The likely range for these estimates is $11-$31 billion in 2050 (equivalent to approximately $5.0-$14.2 billion in today’s economy) and $32-$78 billion in 2075 (equivalent to approximately $8.7-$21.2 billion in today’s economy).^[2] These estimates are derived by applying the historical ratio of Federal disaster relief, as estimated by CBO, to the portion of estimated economic losses from catastrophic hurricanes across 777 counties in 22 states that is attributable to climate change assuming development will continue in coastal communities.

Note that OMB’s approach to determining the contribution of climate change to total expected damages, reflected in the figures presented above, differs from CBO’s approach. OMB’s approach assumes population and incomes in coastal communities will continue to grow as modeled by CBO, and attributes to climate change all damages that would not occur if not for climate change. CBO splits the combined effects of climate change and coastal development between the two factors in proportion to the effect of each in isolation—or 45 percent to climate change and 55 percent to coastal development.

CBO used projections by leading researchers to define the probability distribution of future sea levels and hurricane frequency, and its own projections to define distributions of future population and per capita income in coastal communities. CBO then used those distributions to simulate future hurricane damages with and without climate change using commercially developed damage functions that translate sea levels, hurricane occurrence, and property exposure into expected damage.

The sea level rise projections used in the CBO study combine potential outcomes associated with three different GHG emissions pathways—RCPs 2.6, 4.5, and 8.5. RCP 8.5 is an unmitigated climate change scenario, while RCP 4.5 is a moderate mitigation scenario and RCP 2.6 requires net-negative global emissions in the last quarter of this century. The result of combining sea level rise projections for these emissions pathways is average sea level rise in the United States between 1.4 feet and 2.8 feet by 2075 (CBO, 2016).^[3]

In contrast, the 2014 NCA considered 1-4 feet to be the likely range and 6.6 feet to be an appropriate upper bound for risk-averse planning through 2100. While the difference in global sea level rise across these emissions pathways through 2050 is relatively small, more significant differences emerge in the second half of the century—up to 1.3 feet additional feet in RCP 8.5 compared to RCP 2.6 by 2100 (Kopp et al., 2014).^[4]

In addition, half of the draws CBO used in its simulations of hurricane frequency were based on RCP 4.5, while half were based on RCP 8.5. Given CBO’s approach on both sea level rise and hurricane frequency, CBO’s results may be a fair reflection of the range of possible outcomes given global mitigation efforts, but as a whole underestimate the full effects that would occur in an unmitigated climate change scenario—especially in late-century. See CBO’s report for more information on its methodology.

Key Limitations and Uncertainties

Economic damages attributed to climate change are sensitive to assumptions and limitations in underlying global change models and damage simulations. Uncertainty in hurricane frequency modeling in particular is evident in the spread of CBO’s “likely range” of damage estimates. In addition, note that CBO’s projections only extend to 2075, while global change models show that sea level rise could increase substantially in the final quarter of the century, depending in part on future emissions. The study scope was also limited to hurricane damage, and does not address non-hurricane flood damage in coastal areas (e.g., nuisance flooding at high tide due to sea level rise) or inland areas.

Another significant factor creating uncertainty is the extent to which coastal communities will adapt to growing risks. Several assessments have demonstrated that adaptation mechanisms like protective built and natural infrastructure as well as prudent development patterns can significantly reduce increases in storm damages due to climate change. The CBO study incorporates some representation of adaptation, in particular by generally assuming that damages increase less than proportionately with increases in population and per capita income, as well as by assuming that population and per capita income growth would slow in heavily affected counties. CBO found that expected damages could be 20 percent higher or lower depending on the extent to which hurricane damage is assumed to increase with population and income growth. This highlights the sensitivity of damages to the extent of adaptive response, but also suggests that the order of magnitude of expected damages may not change.

Estimates of fiscal burden attributed to expected hurricane damages depend entirely on the extent to which Federal disaster relief is assumed to be appropriated in the wake of catastrophic storms. The CBO study applies the average ratio of Federal relief to total economic damages for major storms since Hurricane Katrina in 2005. The Federal cost share may grow or shrink over time due to political and other factors that are difficult to predict. However, the share has tended to grow over time (CBO, 2016).

1. Expected damage reflects the average annual costs that can be expected for over several years, but is typically higher than actual damage in most years since it captures small probabilities in each year of particularly catastrophic storms.
2. The likely range reflects the middle two-thirds of CBO’s simulations.
3. The extent of sea level rise at the local level varies due to vertical land motion, such as subsidence, glacial rebound, or large-scale tectonic motion.
4. The 90 percent confidence intervals in 2050 are ~0.6-1.1ft above 2000 levels in RCP 2.6 and ~0.7-1.2ft in RCP 8.5, and by 2100 increase to ~1.0-2.7ft in RCP 2.6 and ~1.7-4.0ft in RCP 8.5 (Kopp et al. 2014).