Alice Hill has posted a fascinating tweet. She argues that the United States needs a Climate Change Adaptation plan. Of course, I agree that climate change poses many threats to different parts of the United States (drought in the West, high heat in the South etc) and to different households (poor people not Bezos and Musk) in the United States and to different sectors in the United States (farming and outdoor blue collar workers versus air conditioned offices and air conditioned WFH workers).
In my 2010 Climatopolis book and in my 2021 Adapting to Climate Change book, I argue that we need competition and innovation to accelerate the pace of adaptation progress. Adaptation is defined to mean that households and firms suffer less damage when Mother Nature hits us with a standardized shock such as a 95 degree day, a drought or a hurricane. Adaptation means that our willingness to pay to not face the shock actually declines!
Capitalists are always innovating and designing products we want (and need?). I claim that climate change is going to make a new generation of entrepreneurs very rich as they design new adaptation products such as air filters. Their products will flatten the vaunted climate damage function and the social cost of carbon could actually decline because of this accelerated pace of induced innovation. Past reduced form research can’t fully capture this progress because in the recent past, we haven’t faced this urgency. Ironically, the more we suffer from climate risks the faster is the pace of adaptation and recovery!
Permit me to offer a historical example focused on market innovation and competition in accelerating adaptation.
Barreca, Alan, Karen Clay, Olivier Deschenes, Michael Greenstone, and Joseph S. Shapiro. "Adapting to climate change: The remarkable decline in the US temperature-mortality relationship over the twentieth century." Journal of Political Economy 124, no. 1 (2016): 105-159.
A free copy of this paper is available here.
Very hot days have always hurt our quality of life and have caused morbidity and mortality risk. The U.S South featured past slow population growth because the region was so hot and humid.
During the 20th century, air conditioning has become cheaper and AC quality has improved. As we have grown richer, we bought these and 95 degree days caused less death. There is basically no government here. People knew that 95 degree days are nasty and they sought solutions. Capitalism (innovation and competition) designed these products and sold them. This is the Adam Smith Adaptation Invisible Hand at work. Read my NBER paper to see how I believe this idea expands to other climate change related challenges.
KEY POINTS
#1 The summer heat is common knowledge. I agree with Alice that many other margins of how climate change affects us are subtle and academics are currently exploring these such as Marshall Burke’s work on the causes and consequences of PM2.5 exposure.
#2 Part of a Government Resilience Plan can focus on investment in public goods to facilitate data collection and dissemination. I support investment in climate satellite reading so that we know in real time across the U.S (and around the world) what are emerging threats. If the government can rebuild trust in its ability to impartially share information, then this will accelerate adaptation on several fronts. So, the partisanship over COVID didn’t help our adaptation efforts going forward. If government featured a trusted “Walter Cronkite” then I would be more optimistic about government’s ability to produce adaptation public goods.
#3 In my Climatopolis book, I argue that places compete for jobs and people. A place like Miami has its charms but will face climate risk. Miami’s property owners and leaders have strong LOCAL incentives to adapt to the challenges the place faces. If they fail to do so, then the place will lose economic vitality in the medium term. This spatial competition protects all of us. A “national plan” isn’t needed here.
#4 Where a NATIONAL PLAN is needed regards to human capital and expertise. The government could invest in designing plans that to adapt to flood risk, fire risk and other challenges and share these with localities who will then tailor them to the specific geographic challenge they face. LOCALITIES should pay for their own defenses. This creates the right spatial incentives and avoids moral hazard. Of course, poor cities have less of a capacity to pay for their defense. Read my 2017 Brookings Paper to see my ideas here;
Kahn, Matthew E. "Protecting Urban Places and Populations from Rising Climate Risk." Washington, DC: The Hamilton Project (2017).
#5 The National Government could use incentives to nudge local electric utilities and water authorities and insurers to introduce dynamic pricing for water and electricity such that when they become scarce (during times of drought and heat waves) that prices rise. Read my Conversation Pieces here and here.
#6 Amine Ouazad and I have new work on the intended and unintended consequences of the Army Corps of Engineers Levee Projects. Who is protected by such projects? Do they lull people into taking on more risk as such place based projects crowd out private self protection? Our microeconomic findings have implications for a national plan on Climate Resilience.
#7 We need insurance reform to accelerate climate change resilience. We need insurers to be able to price gouge in increasingly risky fire and flood zones and we need then to be able to offer non-linear contracts that encourage self-protection. By this, I mean that if a property owner takes verifiable costly adaptation steps that her insurance premium is cheaper.
#8 We need to upzone on higher ground! In my 2021 Adapting to Climate Change book, I discuss this point at length.
#9 We need road pricing. Road pricing would increase urban road travel speeds and this would allow risk averse people to live further from where they work and this would increase their menu of places where they can live and they are more likely to find their “safe niche”.
Note that many of my “climate resilience” plan suggestions are state and local decisions.
I worry that Alice Hill’s “National Plan” would preclude state and local experimentation. Under a “one size fits all” plan, we will learn less and we will not allow our nation to celebrate our diversity. Some people are risk lovers and want the personal freedom to live near a forest. Do we allow then to do so? If they have access to the real time information about the risks they face and if they face the right price signals for living there, then they are free to choose!
So to wrap up, I support a National Plan that increases our collection and distribution of real time Climate Risk data. What people do with this data is their own prerogative.
UPDATE:
I want to return to Michael Porter’s famous Porter Hypothesis. Prof. Porter argues that environmental regulation can have NEGATIVE costs for a firm if it forces a sleepy firm to find waste in its production process that it wasn’t aware of. Older economists will recognize that this is an extension of Herbert Simon’s theory of satisficing under bounded rationality.
One of Alice’s interesting points is that there are communities in the U.S that are not planning for climate change. Why is this so? Would a Federal nudge or $ incentive cause them to do so? If communities are not planning, are individuals planning?
Alice is telling a behavioral story of “sleepy people”. I reject this point. People are aware of the new challenges they face and they use markets and their wits to protect themselves and their families. They hold many real options (including migration) to protect themselves. My 2021 book explores this point at length.