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Hurricane Sandy: Costs to Come

By Ryan Avent (The Economist) - November 1, 2012

THE economic approach to global warming is relatively straightforward. The emission of greenhouse gases generates a negative spillover—global warming—that harms others. Someone driving a car emits carbon dioxide into the atmosphere which contributes to climate change, but because most of the cost of the car’s contribution to warming will be felt by people other than the driver, he has an incentive to drive too much. Aggregate that decision to emit too much across all of the world’s population, and you get a serious economic problem.

Luckily, there is a solution. By taxing the emission of greenhouse gases, one can align private and public costs. The cost of the driver’s emissions will be “internalised”, he’ll drive less, emissions will fall, and warming will slow. All that remains is to tot up an estimate of the “social cost of carbon” and convert that into an optimal tax rate. And in fact, many models reckon the tax need not be too high, as it makes sense to accommodate quite a lot of warming. The costs of climate change will mount over time, but so too will global income, the thinking goes. Economic actors are resilient and will be able to adapt. All in all, we shouldn’t expect global warming to dent expected GDP growth so much that a stifling tax rate is necessary.

There is some wisdom in this analysis. Remarkably, Americans have adopted what is effectively an even more sanguine view of the harm from warming, by refusing to tax carbon and investing quite conservatively in green technology and research. But as the devastation from Hurricane Sandy makes clear, the economic approach is a bit too anti-septic and simplistic a way of understanding and responding too an incredibly complex and potentially catastrophic climate phenomenon. The American approach is out-and-out reckless.

With the superstorm now dissipating, estimates of its economic impact are beginning to emerge. Kate Mackenzie comments on some of them here. Goldman Sachs economist Jan Hatzius notes that damage estimates of $10 billion to $20 billion look small and may well be revised up (Hurricane Katrina was responsible for roughly $113 billion in damage). Yet the observed impact of the storm on economic numbers could be even smaller. October data will probably take a hit, but much of the shortfall may be made up in November and December such that fourth-quarter GDP will hardly register the event. Pimco’s Mohamed El-Erian reckons that the storm will show up in the fourth-quarter data, but mostly because state and federal governments are less fiscally willing and able to provide support. Still, the fact that such an epic storm might not even knock the GDP statistics off track lends credence to those who argue, for instance, that things like a massively expensive sea wall to protect New York City or an Apollo programme for green energy would represent useless waste.

But there are two problems with this mode of thinking. One is that the economic resiliency that allows us to shift economic activity across time and geography, holding down the cost of such storms, has its limits. People cluster together in New York City, despite the high cost of living, because of the extraordinary advantages of being there, surrounded by other skilled professionals. There are “returns to scale” that hold New York together—productivity per person rises with population and density. Given limited disruption, the city will quickly bounce back, but a larger disaster could disperse enough of the city’s people and businesses to undermine the scale that acts as New York’s gravity. That could generate very large economic losses. New York can’t easily be replaced, and even if it were logistically possible to create another megacity there’s no guarantee that resources would re-congeal there. They might stick, instead, to lots of smaller cities: a much less productive distribution.

The more serious issue, however, is simply that GDP is not capturing everything we care about. GDP is a flow of income, for one thing. A storm that destroys existing wealth could actually raise the flow of production in the short term as people rebuild, such that higher GDP growth might nonetheless mean less wealth overall. Moreover, GDP is a very imperfect measure of human welfare. Even if GDP and wealth were relatively unharmed by the storm, we might nonetheless want to prevent a great deal of human suffering. The damage to America’s northeast pales in comparison with the destruction wrought in Haiti, but because Haitians are so poor the economic cost of the damage there is almost imperceptible. The fact that the average Haitian emits about a hundredth as much carbon dioxide each year as the typical American suggests that unaccounted-for economic injustice may be at least as big a concern with global warming as underestimated human costs.

And so it would be entirely appropriate if the damage done by Sandy shakes Americans out of complacency on the issue of global warming, despite the relatively tolerable price tag of the storm. The storm is costlier than the estimated bill reflects. And future storms will be costlier still.

Many scientists and journalists are cautious in listing climate change as a causal factor behind a storm like Sandy. Understandably so: weather emerges as part of a complex system, and it would be impossible to say whether a storm would or would not have materialised without global warming. But scientists are becoming ever less shy in drawing a line between a higher frequency of “extreme” weather events and a warming climate. Climate shifts the probability distribution of such events, and so global warming may not have “caused” Sandy, but it makes Sandy-like storms more probable. As the ever-less-funny joke goes, 500-year weather events seem to pop up every one or two years these days. Frequency and intensity of storms aside, future hurricanes that hit the east coast will do so atop rising sea levels. Contemplate the images of seawater rushing over Manhattan streets and into subway and highway tunnels. Then consider that sea levels are rising. And then reflect on the fact that New York is very much like a typical megacity in being located on the water; tracing a finger around America’s coastlines leads one past most of the country’s largest and richest cities.

Americans may absorb all of this and decide that the smart choice continues to be a course of inaction. They may continue to believe that the storms—and droughts and heat waves and blizzards and floods—to come will be manageable because they’ll be richer and well-equipped to adapt. Hopefully, there will at least be a better sense of what that is likely to mean and the trade-offs it will involve. Adaptation will be an ongoing, costly slog, with a side order of substantial human suffering. It will be one American icon after another threatened. Adaptation is not going to be easy. Hopefully Americans will ask themselves whether it’s so much worse than the alternatives—high carbon taxes or large public investments or both—after all.