Nov. 6 (Bloomberg) -- If the worst Atlantic storm in U.S. history holds an economic lesson, it is this: We all need to come to terms with the cost of climate change.
The increasing frequency with which weather-related disasters occur in the U.S., together with a growing climate-science literature, suggests devastating storms are going to be much more than once-in-a-lifetime events. Aside from the implications for global environmental policy and the survival of the human race, the changing pattern has an unmistakable bottom line: The long-term cost of natural disasters, for everyone from municipalities to mobile-phone companies to homeowners, is going to be much greater than previously thought.
Therein lies an opportunity. Once a cost is recognized, investments to reduce it suddenly make economic sense. Expenditures can be profitable as long as they are smaller than the losses they prevent. This kind of cost-benefit analysis is a major driver of innovation. Medical companies invest in designing better stents for heart surgeries, and hospitals buy them, because they can prevent expensive repeat procedures. Automakers invest in fuel-efficient cars in part because consumers want to reduce gasoline bills.
The potential market is vast. In a recent report, the insurer Munich Re estimated that from 1980 to 2011, weather-related catastrophes cost an inflation-adjusted $1.06 trillion in North America alone, an average of more than $34 billion a year. What’s more, the losses have been rising in a long-term trend consistent with models of climate change. It’s reasonable to assume they will keep growing: The sea levels and water temperatures that contribute to weather disasters will increase even if the world gets serious about combating global warming today.
The challenge, then, is for governments and businesses to find the most cost-effective investments. If, for example, we now expect storm surges to do $10 billion or so in damage every decade in the New York City area, a $15 billion surge barrier might make sense. At the smaller end of the scale, $500 spent on roof sealing for a single-family home can reduce water damage in the event of a hurricane by more than $10,000, according to tests run by the Insurance Institute for Business & Home Safety, an industry-funded group.
The rising cost of weather disasters should also change the calculus of deciding where to build homes and locate industrial facilities. As Bloomberg View has noted, decentralized electricity grids are much more resilient to disaster and can limit blackouts that result in large economic losses. Telecommunications systems might have weathered the storm better if they depended less on a major hub in New York City.
To be sure, investments in reducing weather risk will entail immediate costs. Putting power lines underground in suburban areas, for example, would almost certainly increase electricity bills. On the positive side, the spending would create regular jobs working on infrastructure and technologies designed to reduce our vulnerability to natural disasters, rather than one-time jobs such as sandbagging and rebuilding.
Ultimately, the best way to deal with climate change is a coordinated global effort to address its causes. In the meantime, we are left with the task of mitigating its effects. Now that the potential costs are becoming apparent, the next step is making the investments needed to ensure they don’t become unbearable.
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