Climate Change: The Fiscal Risks Facing The Federal Government/The Current Picture of Fiscal Risk

by Office of Management and Budget

The Current Picture of Fiscal Risk

Climate change is already affecting communities across the United States. The most recent National Climate Assessment (NCA) clearly established the sweeping effects of climate change, many of which are already evident in the lives of Americans. Fifteen of the sixteen warmest years on record globally have occurred between 2000 and 2015, and 2015 was the warmest year on record (NOAA, 2016a). The trend is continuing in 2016, with each of the first eight months in 2016 setting a record as the warmest respective month globally in the modern temperature record, dating to 1880. August 2016 marked the 16^th consecutive month that the monthly global temperature record was broken (NOAA, 2016b), while September 2016 was surpassed only by record-breaking September 2015 (NOAA, 2016c). In addition, heat waves, wildfires and some extreme weather events such as heavy rainfall, floods, and droughts have become more frequent and/or intense in recent years. While scientists continue to refine projections, it is clear that climate change will continue and its damaging impacts will intensify without considerable action to reduce GHG emissions and to respond with adaptive measures. Even with significant near-term emissions reductions, dealing with near- and mid-term impacts due to past and current emissions will still pose challenges.

The impacts of climate change will also affect the Federal balance sheet. For example, an increase in the frequency of catastrophic storms will require more disaster relief spending and flood insurance payouts. Rising seas and heavy rainfall events will prompt investments to protect, repair, and relocate Federal facilities. Changing weather patterns and extreme weather events will affect American farmers and the Federal programs that support their risk management. Climate impacts affecting the nation’s food, water, air quality, weather, and built and natural environments endanger the health of the American people and weigh on Federal health care programs. An increase in wildland fire frequency and intensity will place further strain on Federal fire suppression resources. Climate change shocks and stressors worldwide pose global security risks and affect resource needs for defense operations and infrastructure. Wide-ranging impacts will impede economic production and diminish Federal revenue.

Although the presence of risk across these and other exposure points is clear, we remain in the early stages of quantifying the total likely burden for American taxpayers. In several critical areas, quantitative projections of specific climate impacts are not yet available. The projections we do have are useful in approximating the order of magnitude of potential impacts of climate change on the Federal Budget, but are still subject to significant limitations and uncertainty. As a result, because of these limitations and because other impacts are not considered in this assessment, the total costs of climate change for the Federal Government may be greatly underestimated, and other costs affecting the American people are not considered here. Despite these limitations, the accumulated evidence suggests the fiscal impacts of further unmitigated climate change could leave a significant imprint on the Federal Budget over the course of this century.

Expenditure Impacts

On the expenditures side of the Federal ledger, each of the five program-specific assessments conducted for this report unambiguously illustrates that climate change will raise expenditures. The table below shows estimates of recurring, annual expenditures due to climate change across four of the five program areas—totaling $34-$112 billion per year by late-century, the equivalent of $9-$28 billion per year in today’s economy.

Quantified Increases in Annual Expenditures Due to Climate Change in Modeled Scenarios^[1]

Billions of Real dollars (GDP-Adjusted)[2]	Mid-Century			Late-Century
	Mean	Lo[3]	Hi[3]	Mean	Lo[3]	Hi[3]
Wildland Fire Suppression	$1.3 ($0.6)	$0.8 ($0.4)	$2.0 ($0.9)	$2.3 ($0.5)	$1.2 ($0.2)	$5.0 ($1.0)
Crop Insurance[4]	--	--	--	$4.2 ($1.0)	<$0.1 (<$0.1)	$9.3 ($2.3)
Air Quality-Health Care[5]	$0.6 ($0.3)	<0.1 (<$0.1)	$1.5 ($0.7)	$7.7 ($1.2)	$0.6 ($0.1)	$19.7 ($3.2)
Coastal Disaster Relief	$19 ($8.7)	$11 ($5.0)	$31 ($14.2)	$50 ($13.6)	$32 ($8.7)	$78 ($21.2)
Total Annual Expenditures[6]	$21 ($9.6)	$12 ($5.4)	$35 ($15.8)	$64 ($16.3)	$34 ($9.0)	$112 ($27.6)

Estimated costs reach into the tens of billions per year within just a few decades (2040-2060) and grow into late century (2060-2100). There is also evidence to suggest the costs incurred over the last decade related to extreme weather and fire have already been exacerbated by climate change.^[7] Climate-related costs in these areas also appear likely to vary significantly from year to year, signaling the prospect of budgeting and other planning challenges and greater reliance on emergency supplemental appropriations. Even costs that represent a small portion of the Federal Budget can be severely challenging for individual agencies without responsive adjustments to Congressional appropriations.

In addition to these four program areas, OMB identified significant flood risks to Federal property after reviewing just a sample of the Federal inventory—including $83 billion in Federal assets located in the currently defined 100-year floodplain, $23 billion in assets located in the currently defined 500-year floodplain, and $62 billion in coastal assets that would be threatened by inundation or otherwise severely affected at high tide under a 6 foot sea level rise scenario—but has not estimated the likely costs associated with these liabilities over the coming decades.

Although the combined weight of the quantified mean expenditure estimates in the assessments in this report reaches into the tens of billions to hundreds of billions per year by late-century, this is only a narrow window into the full fiscal risks of climate change. Fiscal impacts in several areas exposed to potentially significant climate risk are not quantified in this report due to data limitations and other challenges. Among these are health care related to vector-borne diseases and other climate change health impacts, national security, the National Flood Insurance Program (NFIP),^[8] transportation and water infrastructure, and inland Federal asset flood risk.

Revenue Impacts

Revenue impacts in an unmitigated climate change scenario appear to be significant. Climate change is projected to reduce economic output in the United States and across the globe. Reduced output in the United States means lost revenue for the Federal Government. The Intergovernmental Panel on Climate Change (IPCC)’s most recent midrange projection suggests that warming of four degrees Celsius over preindustrial levels will occur by 2100 if global emissions are allowed to continue unabated. Economists’ estimates of the economic damages (in terms of reduced consumption) from this level of warming, projected using integrated assessment models (IAMs) of the climate-economy system, range from 1 to 5 percent of global gross domestic product (GDP) each year by 2100 (Nordhaus, 2013). One of the most frequently cited economic models places the estimate of annual damages from warming of four degrees Celsius at about four percent of global GDP (Nordhaus, 2010, 2013). That same model suggests that levels of warming that might occur by mid-century would result in lower annual damages—for example, an increase in 2 degrees Celsius could cause annual damages equivalent to about 1 percent of global GDP—though there are many fewer estimates of climate damages for likely mid-century temperature increases (Nordhaus 2013).

A number of factors affect the magnitude and the known uncertainties of such estimates. For example, the estimates do not account for important factors that remain difficult to quantify in physical terms and are inherently difficult to monetize, such as biodiversity loss, ocean acidification, changes in weather related to changes in ocean circulation, increased severity of certain extreme events, tipping points associated with non-linear changes in the climate, and heightened political instability as a result of climate impacts. In addition, current models factor in economic damages over time but treat the rate of economic growth as if it is unaffected by climate change. A current debate in economics examines whether higher temperatures will decrease the rate of GDP growth in some countries (Dell et al. 2012, Burke and Emerick 2016, Heal and Park 2016). If that is the case, the estimates from IAMs discussed above could significantly understate the potential impact of climate change on global GDP over the long run. Additional research suggesting that economic productivity is nonlinear relative to temperature changes—that there are significant negative temperature threshold effects on productivity in affected sectors—also indicates that the IAM estimates of economic damages from climate change may be conservative (Burke et al. 2015).

The uncertainty of economic damage projections is compounded when attempting to estimate the associated potential for lost U.S. Federal revenue. The exercise relies on difficult assumptions about the U.S. share of global economic losses, the impact of economic losses on U.S. GDP, and Federal revenue as a share of U.S. GDP. For example, while economic losses are commonly expressed as a percent of global output, some portion of those losses occur in the form of non-market losses (e.g., premature mortality or biodiversity loss) that may not directly translate into lost GDP—or Federal revenue.

One simple approach to the first assumption—the U.S. share of global losses from climate change—is to assume that this share would be approximately equivalent to the U.S. share of global GDP (~22 percent of nominal global GDP in 2015). While the U.S. economy is growing faster than most other advanced economies, the U.S. share of global GDP is declining gradually over time, a trend expected to continue (IMF, 2016). In addition, although the United States has significant exposure to the physical impacts of climate change (Melillo et al., 2014), relative to many other strongly affected countries, high income and well-developed institutions (such as insurance markets, as well as public and private resources for emergency preparedness and disaster response) will help the United States to manage those impacts (Kellenberg and Mobarak, 2007). Both of these factors suggest that the U.S. share of climate change damages in mid- and late-century (expressed in terms of GDP) is likely to be lower than the current U.S. share of global GDP.

For illustrative purposes, the figure below shows outcomes for lost Federal revenue in late-century under a range of assumptions about global economic losses and the U.S. share of global losses, holding Federal revenue constant as a share of U.S. GDP and assuming all economic losses translate into lost GDP. At the commonly cited four percent global economic loss estimate at four degrees Celsius warming, lost Federal revenue ranges from roughly $340 to $690 billion per year depending on the portion of global losses that occur in the United States—equivalent to approximately $60-$110 billion per year in today’s economy. These estimates are the product of a simple extrapolation from leading economic loss projections and should be interpreted as indicative of the order of magnitude of potential lost revenue, rather than precise estimates.

Global Losses

		1%	2%	3%	4%	5%
U.S. Share	10%	$86 ($14)	$171 ($28)	$257 ($42)	$343 ($56)	$428 ($69)
	15%	$128 ($21)	$257 ($42)	$385 ($62)	$514 ($83)	$642 ($104)
	20%	$171 ($28)	$343 ($56)	$514 ($83)	$685 ($111)	$856 ($139)

Estimates are in billions of real dollars and (in parentheses) the equivalent dollar estimates in today’s economy in terms of percent of U.S. GDP.

1. The costs in this table are not predictions of the future; they are projections of costs that would be incurred by the Federal Government given a set of assumptions that form the scenarios modeled. See each assessment for more information.
2. Estimates represent snapshots of average annual expenditures due to climate change in the year(s) modeled for this assessment. Topline estimates are in billions of real dollars. Below the topline estimates (in parentheses) are equivalent dollar estimates in today’s economy in terms of percent of U.S. GDP. Adjustment factors vary due to differences in years modeled.
3. The range between Lo and Hi estimates reflects only a portion of the uncertainty associated with cost estimates. See relevant sections of this report for more information.
4. Crop insurance expenditures were only modeled for the late-century time period (2080).
5. While the other three assessments compare an unmitigated climate change scenario to a scenario characterized by historical weather patterns, the air quality assessment compares an unmitigated climate change scenario to a mitigation policy scenario. As discussed in the assessment, mid-century estimates may capture less than half of the full cost increase due to unmitigated climate change, while late-century estimates likely capture the vast majority of the increase.
6. Several likely areas of fiscal risk related to climate change have not yet been quantified.
7. For example, according to NOAA, nearly 1 foot of sea level rise around New York City over the last century, largely due to climate change, led to greater coastal flooding in New York and the surrounding region from Superstorm Sandy than would have occurred a century ago (Rosenzweig, 2012). Superstorm Sandy prompted more than $49 billion in appropriations to help communities rebuild. Wildland fire suppression costs have also increased as fire seasons have grown longer and the size and severity of wildland fires have increased, in part due to climate change (USDA, 2015).
8. A 2013 study conducted for the Federal Emergency Management Agency (FEMA) found that by 2100 the number of NFIP policies would increase by 80-100 percent and the average loss cost per policy would increase by 50-90 percent largely due to climate change (AECOM, 2013). However, legislative changes to the program since this study was conducted may reduce the ultimate fiscal impact of these effects over time.