Sandy’s Unaccounted-for Costs
Image: The Birkes / Flickr
Hurricane Sandy and the system it is merging with are predicted to cause substantial damage across the mid-Atlantic. Damages from climate-related disasters, like this one, are on the rise, both within the US and worldwide. This is due in large part to more people, and therefore more buildings, locating in risky areas. It is also the result of climate change, which scientists predict is altering the frequency and intensity of many extreme events.
Munich Re, a large reinsurance company, estimates that between 1990 and 2010, natural disasters inflicted average damages of roughly $110 billion per year. However, even good sources of data underestimate the damages of extreme weather since they do not include costs that are unobservable or difficult to measure.
Hopefully, injuries and mortality will be minor from Sandy, but many homes and businesses will be damaged, both outside, and in the event of significant flooding, for example, inside as well. Trees will come down and debris will need to be cleaned up. These costs are easy to observe and fairly straightforward to add up.
But there are other costs—more difficult to value—such as when homeowners lose family keepsakes or heirlooms. In addition, there are emotional costs, such as distress from damage to one’s home or fear for the safety of one’s family. These are real costs of a disaster event. Another hard-to-measure loss is environmental degradation, from destruction of coastal ecosystems to pollution from spills triggered by the storm. Environmental economists have many methods to value such losses, but they rarely make it into accounts of disaster damages.
Business interruption—the costs when businesses have to close their doors or halt production—is another huge cost of storms. For instance, thousands of flights in and out of Mid-Atlantic cities were cancelled in anticipation of Sandy. The cost of that lost economic activity alone is substantial. Loss of “lifelines” can also cause business interruption. Widespread power outages are predicted from Sandy. Costs associated with lost business activity from such suspension in critical services can ripple through interconnected economies.
Power outages also hurt homeowners. There are both tangible costs, such as buying flashlights and batteries, as well as less tangible costs, such as annoyance (this also holds for all those travelers stuck on hold for hours waiting to reschedule flights), inconvenience, or actual suffering. When power is lost in extreme heat or cold, it creates mortality risks.
Businesses or governments may also have to undertake measures to maintain safe systems that are not part of day-to-day operations. For instance, extreme rainfall can require water utilities to undertake costly measures to protect the drinking supply if more contaminants are running off into the system. These types of costs, too, are difficult to identify and add up across an impacted area, which, in the case of Sandy, is unusually large.
Many of the economic impacts of natural disasters are distributional—some sectors of the economy are hurt, while others gain. For example, the construction sector might see a slight bump from all the repairs. Other sectors will suffer from delays in re-establishing normal business activity. Many of these costs and benefits are what economists refer to as “transfers” and thus, do not impact the economy overall, even though they can be quite large for individual businesses. For instance, tourists may spend their dollars in a different location, creating a loss in economic activity in the disaster-stricken area, but a gain in a non-disaster area. And while the construction sector might see a boost, funds spent on repair would have been spent on other things, presumably with higher value to those homeowners and businesses, had the storm not occurred.
There are many things that can be done to reduce losses from natural disasters. With climate change increasing the frequency and/or magnitude of many extreme events, the costs and benefits of investing in these activities should be reconsidered with such projections in mind. For instance, of particular relevance to DC and Maryland, power lines could be buried, so that more homes and businesses keep power during storms. Buildings can be built to withstand stronger winds. Homeowners and businesses can purchase insurance to ensure funds are available for rebuilding. Setbacks from the ocean, taking account of increased storm surge projections, could be adopted by coastal communities. None of these investments are free, and many are very expensive. But their costs should be compared to their ability to reduce all the kinds of damage storms bring, not just those that are easy to put a dollar figure on. It is time for a reconsideration of the economics of risk reduction as extreme weather becomes increasingly common.
About Carolyn Kousky
Carolyn Kousky is a fellow at Resources for the Future. Her research focuses on natural resource management, decisionmaking under uncertainty, and individual and societal responses to natural disaster risk.
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Several questions come to mind - is this really extreme weather or are we simply gathering more compete data for estimating the expected range of outcomes? Is this, not the “new” normal but simply a more accurate measure of normal?
Second, who benefits politically by subsidizing extreme risk exposure? Who pays and who gains? Moral hazard is well known but it appears to be ignored. While it seemed completely irrational to put New Orleans back together in the bottom of a bowl, rather than rebuilding on higher ground, policy makers did it. There were financial winners and loosers that might explain what appears to be irrational behavior.
Third, can the self-interested parties, who win through being subsidized to build in harms way, be identified and stopped before we pour billions in insurance claims back into these exposed areas? That is, could insurance companies adjust premiums before reconstruction decisions are made since this might lead to more financially irrational?
Car insurance companies have done a great job addressing moral hazard by making clear to their customers that if they file a claim, their rates are likely to go up.
Finally, we could reclaim water frontage for parkland by limiting the public subsidies (including insurance) for building private property there.
Limiting growth on coastal communities and educating people on the benefits of living in smaller towns would not only relieve the burden on the coastal environment but reinvigorate smaller communities inland that are suffering from diminishing populations. There is no reason why all government departments need to be located in large city centers. Forcing non-essential government operations to small communities inland would help many communities faced with limited job options and those suffering imminent demise.