Planning for the economic risks of climate change

As metropolitan areas across the United States face the threat of climate impacts like floods or extreme weather, we also must ask how businesses and communities can deal with economic issues these climate threats bring on. Will cities with climate risk be able to retain and attract investment, business, and residents in the long-term? How can climate resilience planning, a strategy many cities are adopting, support community planning and economic development in these goals?

C2ES is exploring how climate change might affect cities’ ability to remain attractive places for people, investments, and businesses. Our initial findings indicate that many local leaders —especially in areas with better documented near-term risks—are beginning to consider these emerging questions. However, all communities still need support, guidance, and resources to help address them.

With each nuisance flood and extreme weather event to strike a U.S. city, the potential economic dangers come into focus:

  • Equity and social mobility: It is widely reported that climate impacts disproportionately affect communities of color, low-income families and other socially vulnerable or isolated groups. This can enhance unequal access to resources such as recovery initiatives, transportation, housing and jobs, with far-reaching consequences across city economies.
  • Property value and tax base: In 2016, Freddie Mac reported that sea-level rise in the United States could “destroy billions of dollars in property and displace millions of people,” with social and economic impacts “greater in total than those experienced in the housing crisis and Great Recession.” Another analysis found at least 20 percent of the local property tax base in 120 U.S. coastal communities could be at-risk in 2045, endangering a major source of funding for critical infrastructure and public services. And real estate comparisons show that frequent tidal flooding caused by sea level rise contributed to eroded property values. From Maine to Texas, the lost value for Atlantic and Gulf coastal communities adds up to $15.9 billion.
  • Municipal bonds: Major bond rating firms report $3.8 trillion of outstanding debt in the U.S. municipal bond market, leaving much at stake, given the many ways municipal credit could be impacted by climate change. In fact, investment firm BlackRock expects that without climate action, an increasing share of its municipal bonds will come from regions facing economic losses from rising average temperatures and related events. Within a decade, more than 15 percent of BlackRock’s municipal bonds could be issued by metro areas that stand to lose up to 1 percent of gross domestic product either directly or indirectly. The company expects these losses will mount and affect more cities over time.
  • Municipal credit ratings: Climate impacts could also affect the interest rate for city borrowing, as credit rating agencies start taking climate risk into account. Moody’s plans to incorporate climate risks into municipal bond ratings, and recently acquired the climate risk assessment firm 427. Similarly, S&P has noted that investors look more favorably on municipal assessments when cities have long-term management plans with adequate emergency funds, proper insurance coverage for climate risks, and diverse economies.

Despite these strong signals of imminent economic harm, communities have mixed perceptions and concerns about how extreme weather and chronic climate impacts have caused long-term damage to local economies across the country. Although New Orleans still has not returned to its pre-Katrina state, New York City and Houston have bounced back from their record-setting hurricanes. And while communities in the Hampton Roads area of Virginia are answering pointed questions from credit rating agencies about sea-level rise and chronic coastal flooding, within a couple hundred miles to the south, coastal property development in North Carolina continues at a steady clip, despite years of coastal erosion exacerbated by sea level rise.

But the warning signs continue. A recent New York Times article, based on a new working paper, likened the mortgage market’s climate risks to the subprime crisis, offering a troubling indication that something deeper may be going on that is not yet visible on the surface.

In California, Pacific Gas and Electric cut electric power to hundreds of thousands of residents and businesses last week to prevent power lines in counties across the state from being damaged by high winds and sparking wildfires in areas left susceptible by drought. The blackout left vulnerable populations at risk, required fast preparations and action by local governments and underscored the unexpected ways that small businesses and industries and other members of communities are exposed to climate risks. Gov. Gavin Newsom criticized PG&E, but utility CEO Bill Johnson said the proactive measure is not only necessary now, but may need to be repeated in the future.

C2ES is researching the current limits and frontiers of local climate resilience planning, looking to better understand how these emerging risks are impacting cities and how they can be proactive to protect and improve their quality of life and local economies. This research involves understanding how credit rating agencies, insurance companies, and investors are evolving their assessment of the economic implications, as well as how cities are taking stock of their own risks and revenue streams. These economic impacts extend beyond city borders. If individual communities are unprepared, the nation can expect more economic unpredictability and instability that will affect investors, companies, employees, and homeowners.

Local officials can, and should, consider starting a conversation with their communities and other local leaders to better understand their specific climate-related vulnerabilities. They should explore potential economic benefits of resilience planning and try to identify and measure previously hidden risks to existing revenue streams – like reduced property values and connected city tax revenue that could result from repeated flooding or wildfire in an area. Educating local communities about strategies and options for managing the risks and sharing lessons learned has been a major emphasis for C2ES. Our new research will aim to shed a brighter light on local needs and the true value of resilience.