[#4] Red Queen Race - Part 2: Abandoning Assets

[Excerpt from upcoming book —?It’s Getting Hot in Here:?Reflections of a climate hawk grappling with the inevitable]

The need — or choice — to abandon assets will be contentious and dramatic. It’s one thing to react to a catastrophe and dig in with resolve, it’s another to slowly realize the inevitable and jump ship. Some will figure it out earlier than others. Real estate is a good proxy for a broader class of assets.

The US will see more dramatic changes than Canada. You can’t live where there’s no water. As the Colorado River dries, some homeowners in the US Midwest will get ahead of the curve and bolt for greener pastures before a total collapse in real estate value. Most will stay put until some government agency informs them there’s no more water coming down the pipe. Panic will then ensue and people will clamour to be compensated. Miami has a mirror problem, as sea-water creeps up through porous ground, and pumps can’t keep up. My guess is a lot of libertarians will suddenly embrace a strong state, if only to tap the public purse.

And yet more and more Americans are moving to precisely those areas most prone to climate risk. Arizona, California and Florida are lovely spots. Until economic incentives reflect climate risk, why not live in these gorgeous places? Hurricane risk in Florida may be way up but state and federal governments backstop the insurance industry. In California, both State Farm and Allstate announced they weren’t accepting new applications for property insurance due to “rapidly growing catastrophe exposure”. Both tried to raise rates, but a consumer-friendly policy (Proposition 103) holds rates artificially low. And a publicly backed state pool will fill in the gap when they leave. In Oregon, efforts to map wildfire risk were rejected because it would surely crank up premiums.

The status quo on insurance cannot hold. Eventually the real cost of catastrophic coverage will prevail. For a while, rising rates for everyone will subsidize high risk areas — until competition aggregates hyper-local capital pools across the country. The public sector can only backstop high risk zones for so long — public funds and taxpayer patience are not infinite. Florida has struggled with its insurance market since Hurricane Andrew in 1992. Louisiana sees their own insurance crisis after getting hit by multiple hurricanes (Delta, Laura, Zeta, Ida) in recent years. Some homeowners will choose to live ‘naked’ — without insurance and fully exposed to climate risk. But that too cannot last.

When insurance goes, so does the housing market. When that happens the local economy collapses. That’s why climate-denying Floridian Governors, from Bush to DeSantis, have always backed its insurance market — housing is its ultimate ‘too big to fail’ sector.

Canada has less drought risk, but we’re not immune to these trends. In 2017, when thousands of homes in Quebec along the mighty St. Lawrence flooded, the government provided modest financial relief[1] but indicated there would be no second round. “Rebuild at your risk” was the message. A smart shot across the bow to those who would choose the luxury of willful ignorance on climate risk. For those who rebuilt on the Calgary floodplain there was no such warning — although insurance costs went up.

Indeed, the cost of insurance for everyone[2] has already increased as insurers share elevated climate claims across their customer base. The massive and widespread climate damage we’re seeing in 2023 will accelerate that trend. It’s not just high risk zones like floodplains or forest edges that get expensive (or uninsurable) — any home lacking expensive infrastructure against these risks are penalized.

There are limits to burden sharing. It reveals a moral quandary: it’s good to support those in distress, but why should those who anticipated these risks pay for those who remained obstinate or willfully ignorant? Climate-savvy people who acted prudently, and early, in an atmosphere of general denial of climate risk rightfully feel reluctant to help those who did not. As always, the public purse is the insurer of last resort.

Lots of other kinds of assets will be abandoned. As the US Southwest dries out they’ll abandon hydro plants and large tracts of farmland. The Hoover and Glen Canyon Dams are already near critical levels, they’re long gone in a Bad Warming world. That’s nearly 4 GW of energy production. There are lots of smaller dams. California struggles with water will reverberate nationally since they supply the lions’ share of the US vegetable, fruit and nut crops. Other regions can step up, but that’s of no help to those invested in soon-to-be-parched agricultural fields. Again, Canada appears relatively better off as we’ve not committed our own urban and agricultural assets to marginal areas — like the US southwest — that’s first to fall to climate. The luck of being north.

Harden what we can, and abandon what we can’t. How much does all this running in place cost? Short term it’s tens of billions in Canada alone (2016 disasters were $6 billion, this year is likely ten times that). No-one has any idea over the long term, and quantitative predictions are nonsense[3]. But you can bet it will be a lot, and only increase over time. We’re not close to Bad Warming today.

And yet it can get much worse.

We don’t think of natural systems as infrastructure, but we soon might. Then this story gets really scary. Bad Warming will disrupt all natural ecosystems — rain falling from the sky, nutrient cycling, erosion control, water regulation, pollination, forest health, oceanic food chains. Once broken, these systems are effectively unfixable. You don’t replace the wheat fields of Kansas with urban greenhouses. These ‘services’ fall outside economic frameworks. They’re invisible to those addicted to spreadsheets. Want to put a price on this stuff? It’s around $50 trillion annually (for perspective: that’s twice current global GDP). Even if you think that estimate is environmentalist propaganda (it’s not) — chop it by 90%. That’s still $5 trillion a year. Losing even a portion of these services, which we’re bound to do, is worse than running in place. It’s like breaking the Red Queen’s legs.

Once we understand what’s at stake we’ll pay for a kind of insurance against natural systems breakdown. What kind of insurance? We’ll try to suck all that excess CO2 out of the atmosphere to pre-Bad Warming levels. We’ll hit 500 ppm before we get to net zero. That means we’ll need to suck 3 trillion tonnes of the stuff back out of the air. At a super-optimistic cost of $50/tonne that means $150 trillion over the next many decades. We can afford it. It’s the annual spend of wars like the ill-fated one in Iraq. But it sure is a lot of money. Just to make sure this nightmare doesn’t go on forever. Just to keep the Red Queen from falling over.

Future economists will argue over which areas we can save, which sea-walls get a better bang for the buck and which highways should be abandoned and which rebuilt. Outraged citizens will despair over abandoned housing. City councillors will work in vain to resuscitate devasted local economies. Politicians will fight over who pays for it all as insurance companies run for the hills.

Through all that complexity emerges all a clear analogy for the work ahead: digging holes and filling them in. Instead of new infrastructure, we spend precious resources to protect or replace what we already have. Less productive investment, more defensive investment. Spending money to stay where we are. Running to stay in one place, like the Red Queen.

[1] A limit of $200,000 for the home, and $130,000 for the land.

[2] My home in Quebec has near-zero risk for flooding, yet my insurance went up to cover ‘increased general flood risk’.

[3] However, it’s worth pointing out the White House Office of Management and Budget pegs a cost to just the public purse of $2 trillion annually by the end of the century to cover direct disaster relief.