Weeks 15-16

Climate Change Adaptation

Author

Byeong-Hak Choe

Published

December 1, 2025

Modified

December 7, 2025

On December 3 and 8, we will introduce the role of adaptation in responding to climate change. We will also discuss decision-making under uncertainty, focusing on examples such as insurance markets for climate-related risks, including floods.

On December 3, 5, and 8, we will have project presentations.

🎲 Cost–Benefit Analysis under Risk and Uncertainty

Many cost–benefit analyses (CBAs) must evaluate projects whose future consequences are not known with certainty. For instance, operating a nuclear power plant always involves some possibility of a serious accident and a large radiation release. Any CBA of such a plant must somehow incorporate that possibility into the evaluation.

Economists distinguish carefully between risk and uncertainty. Under risk, all relevant outcomes are known (or at least can be described), and the probabilities of these outcomes can be estimated with reasonable accuracy. Statistical studies of smoking are a classic example: no one can say whether a particular smoker will die early or live a long life, but for a large population the increased probability of early disease and death can be measured. In a CBA with risk, we can list all possible outcomes and attach approximate probabilities to each, even though we do not know which one will actually occur.

In this sense, the risks of a catastrophic nuclear accident or a major offshore oil spill can be treated as quantifiable. Analysts might, for example, estimate a one-in-1,000 chance of a severe nuclear accident over a plant’s lifetime, or a one-in-5,000 chance of a large oil spill from a given offshore well. These probabilities may be rough, but they are treated as usable inputs into a risk-based CBA.

Uncertainty, by contrast, refers to situations where important outcomes are unknown or where meaningful probabilities cannot be assigned. Global climate change provides a key example. Climate models suggest a likely range of global temperature increase (for instance, 1–6°C over the next century), but the climate system is so complex that more extreme and highly nonlinear events are possible. Positive feedback loops—such as the release of methane from thawing Arctic permafrost—or disruptions to major ocean currents like the Gulf Stream could greatly alter regional climates. Despite improved climate modeling, no one can reliably quantify the probabilities of these extreme possibilities.

When we face risk (but not deep uncertainty), we can incorporate it quantitatively in a CBA using expected value. For a single possible outcome \(x_i\), with probability \(P(x_i)\) and net benefit \(NB(x_i)\), the expected value of that outcome is

\[ EV(x_i) = P(x_i)\times NB(x_i). \]

If there are several mutually exclusive outcomes, the overall expected value is the probability-weighted sum:

\[ EV(X) = \sum_i \left[ P(x_i)\times NB(x_i) \right], \]

where \(P(x_i)\) is the probability of outcome \(i\), and \(NB(x_i)\) is the associated net benefit (or net cost, if negative). Expected value is therefore the probability-weighted average of all possible net outcomes.

To illustrate, consider a proposal to build a dam for flood control with a cost of $7 million. The dam’s net benefits depend on how much precipitation occurs in the future. Suppose four precipitation scenarios are identified: low, average, high, and extremely high. In the first three scenarios, the dam successfully prevents damaging floods and yields positive net benefits; under extremely high precipitation, however, the dam fails, causing large net damages.

Assume we have estimated the following hypothetical net benefits and probabilities:

  • Low precipitation: net benefit of about $5 million, probability 0.27
  • Average precipitation: net benefit of about $10 million, probability 0.49
  • High precipitation: net benefit of about $20 million, probability 0.23
  • Extremely high precipitation (dam failure): net loss of about $100 million, probability 0.01

Multiplying each net outcome by its probability and adding them up yields an expected value of approximately $9.85 million. If we interpret these net benefits as already incorporating all costs and benefits (including the dam’s construction cost), the analysis would suggest building the dam, so long as no alternative project yields a higher expected net benefit.

However, the expected-value calculation does not reflect risk aversion, the common tendency for people to prefer a certain outcome over a risky one with the same expected value—especially when large losses are possible. Suppose you must choose between receiving $100 for sure and a 50–50 gamble that either pays $300 or loses $100. The expected value of the gamble is

\[ EV = (0.5 \times \$300) + (0.5 \times -\$100) = \$150 - \$50 = \$100, \]

so both options have the same expected value. Yet many people would prefer the certain $100 because they dislike the downside risk.

Applied to the dam example, risk aversion implies that the small probability of an extremely costly dam failure might be given more weight than the expected-value calculation suggests. Even though the 1% chance of failure barely changes the overall expected net benefit, people living downstream may find that small chance morally or politically unacceptable. Analysts could respond by explicitly placing extra weight on low-probability but severe negative outcomes or by adopting decision rules that go beyond simple expected value—especially given that climate change could increase the frequency of extreme precipitation events beyond the assumed 1%.

This brings us to the precautionary principle, which argues that policy should account for uncertainty by taking steps to avoid low-probability but potentially catastrophic outcomes. The principle is particularly compelling when environmental impacts are irreversible. Some forms of environmental damage can be reversed over time or mitigated by changing behavior or technologies. In those cases, a conventional cost–benefit balancing may be more defensible. But when essential natural systems could suffer irreversible harm—such as species extinction or fundamental damage to the climate or ozone layer—a “wait-and-see” approach may be too risky.

In such cases, a safe minimum standard is often recommended: environmental policy should be set so as to prevent catastrophic outcomes, even if this means forgoing some economic benefits. The global response to ozone depletion is an example. Given that serious thinning of the ozone layer could greatly increase harmful ultraviolet radiation and threaten life on Earth, international agreements have imposed near-total bans on many ozone-depleting substances, despite their previous economic usefulness. This reflects a deliberate choice in favor of safety and long-term planetary protection over short-term gains when facing deep uncertainty and potentially irreversible damage.

Reference

  • Chapter 7 of Environmental and Natural Resource Economics: A Contemporary Approach, by Jonathan Harris and Brian Roach
    • ISBN-10: 0367531380
    • ISBN-13: 978-0367531386


🛡️🌱 Climate Adaptation

Introduction—The Role of Adaptation Policy

Cutting greenhouse gas emissions, or mitigation, is essential for limiting the long-run magnitude of climate change, but it cannot fully prevent climate damages. Some impacts are now unavoidable because of warming already “baked in” by past emissions and the possibility of crossing climate tipping points. For this reason, climate adaptation is a necessary complement to mitigation rather than an optional extra.

The IPCC defines climate adaptation as an adjustment to actual or expected climate and its effects. For human systems, adaptation means changing behaviors, investments, or institutions in ways that reduce harm or take advantage of possible benefits. For natural systems, adaptation refers to ecological adjustments to actual climate, while people may also intervene to help ecosystems cope with anticipated future changes. Adaptation policies can be proactive, taken in advance of expected impacts such as elevating homes or updating building codes, or reactive, taken after damages occur, such as rebuilding after a flood or wildfire. Historically, most adaptation has been reactive, responding after storms, floods, and fires, but as hazards become more frequent and intense this strategy becomes increasingly costly. A central policy challenge is how communities and governments should prioritize among many possible proactive adaptation measures when resources are limited.

Adaptation—Flood, Fire, Water Scarcity

Vulnerability, Risk, and the IPCC “Risk Propeller”

Climate change generates physical hazards such as more intense storms, heatwaves, droughts, wildfires, and sea level rise. However, the eventual impacts and risks depend not only on these hazards but also on who and what is exposed and how vulnerable those people and assets are. The IPCC summarizes this interaction using a “risk propeller” diagram, in which climate hazards, exposure, and vulnerability overlap to produce risks that can exceed the capacity to adapt and lead to loss and damage.

Human societies can shape each of these elements. They can pursue adaptation policies that reduce vulnerability and exposure, or in some cases enact measures that inadvertently increase risk, a phenomenon known as maladaptation. They can also mitigate emissions to limit future hazard intensity, and they can either degrade or restore ecosystems that themselves provide livelihoods and protection. Ecosystems can adapt up to certain limits and can contribute to mitigation and adaptation, for example through coastal wetlands that buffer storms, but they are also sensitive to the pace and magnitude of climate change. Vulnerability is highly context-specific. High-income countries with strong institutions and infrastructure, such as the Netherlands, can invest heavily in sophisticated flood protection and spatial planning. Low-lying, poorer island nations often have far less adaptive capacity and therefore face much greater risk from similar physical hazards.

Adaptation and Mitigation—Complements or Substitutes?

Mitigation reduces climate damages by lowering greenhouse gas emissions and thereby limiting global warming itself. Adaptation reduces damages from the climate impacts that still occur, for example by reducing flood losses through levees, zoning, and insurance reforms, or by hardening infrastructure against heat and storms. In economic terms, mitigation and adaptation are both instruments for reducing climate damages, and each has an upward-sloping marginal cost: the more you do, the more expensive each additional unit tends to become.

For that reason, mitigation and adaptation are complements in an optimal policy portfolio. A cost-minimizing strategy almost always uses some mix of both rather than relying exclusively on one or the other. However, they are also substitutes at the margin. Greater mitigation reduces the severity and frequency of impacts, which lowers the marginal benefit of additional adaptation, and more adaptation can reduce the marginal benefit of additional mitigation by reducing the damages that mitigation would otherwise prevent. If the costs of mitigation fall, an efficient response is to do more mitigation, thereby reducing residual damages and diminishing the optimal level of adaptation, and vice versa.

Public debate sometimes frames mitigation and adaptation as mutually exclusive options, suggesting that a society should simply pick whichever is cheaper. Economic analysis shows that this “either–or” framing is misleading. Because both instruments have rising marginal costs and act on different parts of the damage process, relying on both is generally cheaper than extended reliance on just one. They also differ in scope and timing. Mitigation has broad global effects on the climate system and needs to be undertaken early because greenhouse gases accumulate in the atmosphere. Adaptation tends to be local and hazard-specific, and in some cases can be delayed until impacts and vulnerable locations are better understood, though some anticipatory adaptation is still important. Institutions such as the World Bank emphasize an integrated portfolio that runs from emissions reduction to coping with unavoidable impacts, acknowledging that some losses will be irreversible. Within this framework, efficient adaptation means choosing measures that minimize the sum of climate damage costs and adaptation costs.

Climate Adaptation: Flood Risks—Storms, Sea Level Rise, and Storm Surges

Recent decades have seen a sharp rise in the number and cost of climate-related disasters, especially floods. In 2021 alone, there were dozens of weather events worldwide that each caused more than one billion dollars in damage. Some of the largest were floods in the United States, Central Europe, and China, which collectively produced losses in the hundreds of billions of dollars. Globally, 2021 ranks among the costliest years on record for weather disasters, and floods account for more damage and affect more people than any other type of natural hazard.

A central idea in this context is resilience. In ecology, resilience refers to an ecosystem’s ability to recover from shocks. In policy-oriented definitions used by the IPCC and the U.S. National Research Council, resilience is the capacity of social, economic, and environmental systems to prepare for, absorb, recover from, and adapt successfully to adverse events while preserving essential functions and structures. Empirical work in the United States suggests that investments in pre-disaster mitigation for hazards such as floods, windstorms, and earthquakes have very high returns, with each dollar spent on mitigation saving several dollars in avoided future losses. Resilience can be enhanced by better information about risks, well-designed incentives that encourage private risk reduction, and public investments in protective infrastructure.

Flood Insurance in the United States

Floods are among the most frequent and costly natural disasters in the United States. Before 1968, repeated large floods along rivers such as the Mississippi convinced many private insurers that flood risk was essentially uninsurable, because catastrophic events could generate claims from entire communities at once and overwhelm premium reserves. In response, Congress created the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA). The program’s objectives include providing flood insurance where private markets had largely withdrawn, improving floodplain management, and developing and maintaining maps of flood risk.

In principle, a well-designed flood insurance system can both speed post-disaster recovery by providing timely funds and encourage households and communities to reduce risk if premiums accurately reflect individual risk levels. In practice, however, the NFIP has struggled to achieve these goals. Insurance is generally not mandatory except for properties in mapped high-risk flood zones that carry federally backed mortgages. In those zones, lenders must require coverage, and flood maps determine which properties fall into that category. NFIP premiums have frequently been set below actuarially fair levels, leading to chronic program debt that reached tens of billions of dollars after clusters of large storms. Political resistance to premium increases, combined with outdated flood maps that understate risk in a warming climate, has undermined attempts to move pricing closer to actual risk. While the program offers substantial premium discounts for elevating structures, other effective mitigation measures are undervalued and therefore underused. This combination of underpriced coverage, imperfect signals of risk, and limited incentives for mitigation has led to repeated rebuilding in high-risk locations.

Example – Enhancing Resilience with Flood Insurance (and Its Pitfalls)

From an efficiency perspective, a flood insurance scheme should set premiums high enough to cover expected claims and differentiate those premiums according to the risk of each property, thereby rewarding low-risk locations and investments that reduce vulnerability. The NFIP has historically violated both conditions. Numerous properties have received subsidized rates or “grandfathered” premiums that do not rise along with increasing risk. As a result, some structures have become “severe repetitive loss” properties, filing claims over and over and being rebuilt in the same place with NFIP funds. In extreme cases, single homes have flooded many times, with cumulative payouts exceeding the property’s value. This dynamic shifts substantial risk onto taxpayers, encourages households to remain in highly exposed locations, and undermines the program’s financial sustainability. It illustrates how insurance intended to enhance resilience can, if poorly designed, create moral hazard and increase long-run damages.

Proactive versus Reactive Adaptation Strategies

Rebuilding after floods or hurricanes is a classic example of reactive adaptation, in which action is taken only after damage has occurred. When rebuilding is supported by subsidized or underpriced insurance, reactive responses can become perverse incentives that lock people into risky places. Rules that require insurance payouts to be spent on rebuilding in the same location reinforce this effect and shift the consequences of repeated risk-taking onto a wider public. This pattern has contributed to the NFIP’s unsustainable debt, especially after major storm seasons such as 2005 and 2017.

Recognizing these problems, policymakers have pursued reforms aimed at shifting toward more proactive adaptation. The Biggert–Waters Flood Insurance Reform Act of 2012 sought to strengthen the program’s finances by increasing flood insurance rates and phasing out subsidies, particularly for second homes and properties with multiple losses. However, concerns about affordability led to the Homeowner Flood Insurance Affordability Act of 2014, which capped annual premium increases, reversed some of the earlier rate hikes, and allowed newly mapped properties a temporary period of lower “preferred risk” rates. FEMA also operates hazard mitigation grant programs that fund projects such as elevating buildings or improving drainage. The Community Rating System scores communities according to their implementation of flood risk reduction measures, and communities that adopt more protective policies receive premium discounts for their residents. The Disaster Recovery Reform Act of 2018 set aside a share of annual disaster assistance for pre-disaster mitigation, allowing funds to be used for resilience-enhancing infrastructure rather than only for rebuilding. Most recently, the NFIP’s Risk Rating 2.0 reforms aim to link premiums more closely to individual property values and specific flood risks, addressing long-standing inequities in which lower-value homes often overpaid while some high-value coastal homes underpaid.

Flood Insurance around the World

Globally, flood insurance systems differ along two main dimensions: whether the government or private markets bear the ultimate risk, and whether flood coverage is bundled with other perils such as fire and wind or sold separately. Combining these yields four broad models: bundled coverage backed by private insurers, bundled coverage backed by the state, optional unbundled private coverage, and optional unbundled government-backed coverage like the U.S. NFIP.

Countries such as the United States, Germany, Austria, and South Africa have largely unbundled, optional flood insurance in which high-risk properties disproportionately purchase coverage, leading to limited risk pooling and financial strain. The United Kingdom, Hungary, and China have systems in which flood is often bundled into multi-peril policies, improving pooling and cross-subsidization. France and Spain operate government-backed bundled schemes where private insurers provide coverage up to a threshold, with the state assuming catastrophic losses above that level. In many low-income Asian countries, flood risk is very high but incomes and institutional capacity are low, so only a small fraction of disaster losses are insured compared with levels in North America and Europe.

Rethinking Flood Insurance

Even when flood insurance is available, take-up can remain low. In the United States, only about half of properties in mapped high-risk flood zones carry NFIP policies, despite purchase requirements tied to mortgages. Behavioral research suggests that households often underprepare for low-probability, high-consequence events due to a combination of myopia, forgetting past disasters after a few quiet years, optimistic beliefs that “it will not happen to me,” inertia and procrastination in the face of complex decisions, simplification when confronted with difficult risk information, and social herding in which people copy neighbors’ behavior rather than respond to objective risk measures.

Myopia (Present Bias)

People often focus too much on immediate costs and too little on long-term benefits when making decisions about protection against risk. Even when a preventive investment would reduce future losses and insurance premiums over many years, the upfront expense can feel too large to justify. As a result, people may reject investments that would be financially worthwhile if evaluated over a longer time horizon.

Amnesia

Concern about disaster risk tends to rise sharply right after a flood or storm but fades quickly as time passes without another event. Many people buy insurance only after experiencing damage and later cancel it if nothing happens for a few years. Over time, the memory of risk weakens, and insurance comes to be seen as unnecessary rather than as ongoing protection. This pattern leads to short insurance coverage periods despite long-term exposure to risk.

Optimism

People commonly believe that disasters are more likely to happen to others than to themselves. If they have never experienced a flood, they often assume it will not affect them in the future. Instead of imagining serious damage, they focus on hopeful scenarios in which nothing bad occurs. This tendency causes individuals to underestimate both the likelihood and the consequences of extreme events.

Inertia

Many people stick with their current situation simply because change requires effort. Evaluating new options, gathering information, and making decisions can feel costly in terms of time and attention. As a result, people delay or avoid taking protective actions, even when doing so would reduce future losses. Staying with the status quo often feels safer than taking uncertain action.

Simplification

When deciding whether to buy insurance, individuals often focus only on how unlikely a disaster seems and ignore how costly it would be if it did occur. If the chance of a flood feels very small, people may treat the risk as unimportant and give little weight to potential losses. This oversimplified reasoning leads many to undervalue insurance even when the financial consequences of disaster would be severe.

Herding

People frequently look to others for guidance when making decisions under uncertainty. If friends and neighbors choose not to buy insurance, individuals are much less likely to purchase it themselves. In this way, social norms and group behavior can strongly influence insurance decisions, sometimes more than objective assessments of risk.

Some NFIP rules unintentionally reinforce these behavioral tendencies. Requirements that payouts be used to rebuild at the same site discourage relocation, while subsidized premiums and outdated maps understate risk. As a result, the program may encourage continued occupation of highly exposed areas rather than facilitating safer settlement patterns. An alternative approach would place greater emphasis on non-structural, preventive measures such as land-use zoning that limits development in floodplains, stronger building codes that reduce vulnerability, and infrastructure standards that incorporate future climate risk. Studies by institutions such as the National Institute of Building Sciences find that investments in hazard mitigation, whether through stricter codes, federal grants, or infrastructure upgrades, yield high benefit–cost ratios by reducing deaths, injuries, property damage, business interruption, service outages, and mental health harms. These findings support a shift from reactive rebuilding and subsidized insurance toward more proactive risk reduction.

Sea Level Rise and the Role for Adaptation

Sea levels are rising globally and are expected to continue rising throughout this century and beyond, with the exact amount varying by region and emissions pathway. Tools such as the NOAA Sea Level Rise Viewer illustrate which areas, assets, and populations would be exposed under different sea level scenarios. Many billions of dollars of coastal buildings and critical infrastructure, including roads, bridges, water treatment plants, and levees, are at risk. Roughly 40 percent of the world’s population lives within 100 kilometers of the coast, and in the United States coastal counties generate a very large share of economic output, employment, and wages.

Adaptation options for sea level rise and coastal flooding span a spectrum from hard engineering to nature-based solutions and retreat. Hard infrastructure such as seawalls and bulkheads can provide strong local protection but is expensive and can worsen erosion or flooding in neighboring areas and damage coastal ecosystems. Offshore structures such as breakwaters can dissipate wave energy before it reaches the shoreline and may have fewer ecological side effects. Living shorelines that rely on plants, sand, rock, and oyster reefs can attenuate waves, stabilize shorelines, and provide habitat and other ecosystem services at relatively low cost, although they require time to establish and may be overwhelmed under extreme conditions. Managed retreat, in which people and structures are moved out of high-risk zones, is the most proactive form of adaptation but is socially and politically difficult to implement.

Comparing Shoreline Protection Options

Seawalls and bulkheads embody a “hard defense” strategy. They can significantly reduce local erosion and storm damage and are familiar to engineers and coastal planners. However, they typically require very large capital investments, can block public access to coasts, and may alter sediment dynamics in ways that increase erosion and flood risk in adjacent areas. Offshore breakwaters represent an “offensive” strategy that intercepts wave energy offshore. Because they are more permeable, they tend to have less dramatic impacts on water quality and ecological conditions and may be cheaper in some contexts, though they still demand careful design and maintenance.

Living shorelines seek to harness natural processes by using marsh vegetation, dunes, and reefs to stabilize coasts. Once established, they can be highly effective at reducing wave energy and erosion, while simultaneously improving water quality, sequestering carbon, and providing habitat. Their performance, however, depends on sufficient space, moderate wave conditions, and ongoing management. In practice, many communities combine elements of these approaches, layering engineered structures with restored ecosystems to balance protection, cost, and environmental quality.

Example – Beach Renourishment: Buying Time

Beach renourishment is a widely used adaptation measure in which sand is dredged from offshore or transported from other locations and placed on eroding beaches to restore their width and elevation. Since the mid-twentieth century, hundreds of miles of U.S. coastline—particularly along the Atlantic and Gulf coasts—have been renourished at a cumulative cost of several billion dollars. A case study from North Carolina’s Outer Banks illustrates the potential benefits. The town of Nags Head undertook a large renourishment project in 2011, funded principally through local taxes. Neighboring towns such as Kitty Hawk did not. When Hurricane Sandy struck in 2012, Nags Head sustained relatively modest damage to buildings and infrastructure, while nearby communities suffered millions of dollars in losses. The contrast prompted those communities to pursue renourishment projects of their own.

Despite these benefits, renourishment faces important constraints. Suitable sand sources are limited, so successive projects often require sand from farther offshore or from more distant locations, raising costs. Renourished beaches generally erode again and thus require repeated interventions. Renourishment can also create a feedback loop: restored beaches increase property values and spur development, enlarging the tax base and political pressure for future renourishment, which deepens reliance on a strategy that may not be sustainable under accelerating sea level rise. Thus, beach renourishment can effectively buy time and improve short-run resilience but cannot substitute indefinitely for deeper changes in settlement patterns and protection strategies.

Managed Retreat: Buyouts

Managed retreat, in which communities move out of harm’s way rather than fortifying in place, is another adaptation approach that has received growing attention. In the United States, FEMA has used post-disaster buyout programs to acquire heavily damaged properties in flood-prone areas. After major events such as Hurricane Ike in Texas and Hurricane Sandy in the northeastern United States, governments purchased thousands of homes, removed structures, and converted the land to parks, open space, or restored wetlands.

Buyouts can generate multiple benefits. They directly reduce exposure by permanently removing housing from high-risk flood zones. The resulting open space often functions as a natural floodwater storage area, reducing downstream flooding and providing ecosystem services such as recreation and habitat. Between the late 1980s and the late 2010s, tens of thousands of properties were acquired through FEMA programs. However, implementation has often been slow, and programs tend to be reactive, ramping up only after the most damaging events. Truly proactive retreat—moving communities before catastrophic floods occur—raises difficult questions about funding, equity, cultural attachment to place, and political acceptability. As climate change increases flood risk, buyouts and other retreat strategies are likely to play a larger role but will need to be carefully designed to be fair and effective.

Prioritizing among Adaptation Options in the Presence of Ethical Boundaries

When choosing among adaptation options, institutions such as the World Bank commonly use benefit–cost analysis, cost-effectiveness analysis, and, in some cases, multi-criteria analysis. Benefit–cost analysis compares the present value of benefits, such as reduced damages or lives saved, with the costs of a project, and prioritizes measures with the highest net benefits. Cost-effectiveness analysis identifies the least-cost way to achieve a given physical target, for instance a specified reduction in expected flood damages or number of houses protected. Multi-criteria analysis allows decision-makers to incorporate both quantitative and qualitative criteria, weighing economic efficiency alongside factors such as social acceptability, environmental impacts, and cultural heritage.

These tools raise ethical and distributional concerns. A purely benefit-maximizing buyout program might prioritize expensive coastal neighborhoods because high property values inflate measured benefits, even if poorer, more vulnerable communities face greater physical risk. Distributional benefit–cost analysis can address this by giving extra weight to benefits accruing to disadvantaged groups, but doing so requires explicit political judgments about equity. Cost-effectiveness analysis can sidestep some valuation issues but still does not resolve how to distribute protection across communities. Multi-criteria approaches embrace this plurality of values but can become opaque and contested when stakeholders disagree on the importance of different criteria. In practice, economic tools are most useful when combined with local knowledge and procedural fairness, to avoid systematic bias against politically weaker or marginalized groups.

Information as an Adaptive Strategy

Timely and accurate information is often seen as a low-cost adaptation strategy. If people in harm’s way receive earlier and more precise warnings, they can evacuate, protect property, and adjust behavior in ways that reduce risk. Modern forecasting systems for hurricanes and other hazards have greatly improved lead times and track predictions. However, information is not costless. Early forecasts are inherently uncertain and can generate significant stress and disruption, especially when they are frequently updated or when warnings cover large areas that may not ultimately be affected.

This trade-off is captured by the “cone of uncertainty” shown in hurricane forecasts, which displays the range of possible storm tracks over time. To avoid failing to warn places that will in fact be hit—a Type II error—forecasters often issue warnings to many locations that will not ultimately experience severe conditions, thereby increasing Type I errors. Each warning triggers preparations, business closures, evacuations, and anxiety, which have real economic and health costs.

Example – Hurricane Exposure, Forecasting, and Birth Outcomes

A study of Hurricane Irene’s approach to North Carolina examines these hidden costs by looking at birth outcomes for more than 700,000 infants. Many pregnant people lived in counties that spent hours within the projected cone of uncertainty but ultimately experienced little or no storm damage. The research finds that for pregnant individuals in these falsely alarmed areas, birth weights declined on average as the time spent in the cone increased, with small but statistically significant reductions associated with each additional six hours of exposure to the forecasted path. Low birth weight is known to be linked to long-term disadvantages in health, cognitive development, and earnings.

These results suggest that the psychological and behavioral stresses associated with disaster warnings, even when no physical impact occurs, can have meaningful health implications. As climate change increases the frequency and intensity of hurricanes, forecast centers may become more risk-averse and expand warning zones, potentially increasing such hidden costs. Policymakers thus face a difficult balancing act: early and broad warnings save lives and reduce physical harm, but over-warning and false alarms impose their own burdens. The optimal strategy may vary across contexts and vulnerable populations, and there is no simple rule that resolves the trade-off.

Climate Adaptation: Wildfire Risk and Management

Climate change, through higher temperatures, changing precipitation patterns, and longer fire seasons, has intensified wildfire risk in many regions, including areas previously considered relatively safe. In the western United States, the average annual area burned has increased dramatically compared with the late twentieth century. A single recent year generated wildfire damages in the tens of billions of dollars, while federal spending on fire suppression reached several billion dollars. The most destructive fires in terms of structures lost have mostly occurred within the past couple of decades.

The impacts of wildfires extend well beyond direct property damage. Smoke from wildfires has become a major source of fine particulate pollution, contributing a substantial share of population exposure to PMâ‚‚.â‚… in the United States and affecting mortality and morbidity. Large fire seasons in countries such as Brazil and Australia have caused thousands of premature deaths and added billions in health-care costs. After fires, heavy rains can mobilize ash and sediment, degrading water quality, clogging reservoirs, and damaging water infrastructure. These cascading effects can shorten reservoir lifetimes, force communities to seek expensive alternative water sources, and reduce the reliability of water supplies for cities and agriculture. Although economic research quantifying the full spectrum of wildfire damages is still emerging, the existing evidence indicates that total costs are far larger than direct suppression expenditures and insured losses.

Wildfire Adaptation Policy Options

A range of policy instruments exists to help societies adapt to increasing wildfire risk. Fuel management measures such as prescribed burning and mechanical thinning can reduce the accumulation of combustible material in forests, lowering the intensity and spread of fires. Investments in firefighting capacity, including more personnel, better equipment, and improved detection and communication systems, can enhance the ability to respond quickly when fires start. Utilities have begun using public safety power shutoffs during extreme fire weather to reduce the likelihood that power lines will ignite fires, though these measures can disrupt electricity service and have their own costs.

Insurance markets for wildfire risk can help households and businesses manage financial losses, but they face challenges similar to flood insurance when risks are highly correlated and growing. Land-use planning and building regulations are crucial, especially in the wildland–urban interface where development expands into fire-prone landscapes. Zoning can limit new construction in the highest-risk areas, and building codes can require fire-resistant materials, defensible space around structures, and other design features that reduce flammability. As with flood risk, wildfire risk is shaped by the combination of hazard, exposure, and vulnerability, and effective adaptation requires attention to all three.

Example – Mandatory Adaptation Benefits Homeowners and Neighbors

Evidence from California’s adoption of wildfire-resistant building standards illustrates the benefits of mandatory adaptation. Researchers comparing homes built before and after fire-resistant codes were implemented in the same neighborhoods find that post-code homes have a substantially lower probability of burning in wildfires. The risk reduction is on the order of several tens of percent for the coded homes themselves and is accompanied by smaller but meaningful reductions in damage risk for neighboring properties, reflecting positive spillovers from one household’s investments to others nearby.

These codes also reduce uninsured losses, which are significant because many households either lack insurance or are underinsured for wildfire risk. For new construction, the additional costs of complying with the codes appear to be modest relative to the expected reduction in damages, suggesting that the standards pass a benefit–cost test. Retrofitting existing homes to the same standard can be considerably more expensive, making cost-effectiveness less certain. The distribution of wildfire adaptation benefits raises equity concerns. Data suggest that suppression efforts and fuel management are more intensive near higher-value communities, implying that wealthy areas may enjoy greater protection. Extending stringent building codes and other adaptation measures more broadly could help equalize risk reduction, but doing so would also influence where new development occurs and who can afford to live in the most protected areas. These tensions highlight the importance of integrating efficiency, equity, and long-run land-use planning into wildfire adaptation policy.

Reference

  • Chapter 14 of Environmental and Natural Resource Economics, by Tom Tietenberg and Lynne Lewis
    • ISBN-10: 1032101180
    • ISBN-13: 978-1032101187
  • Kousky et. al., Flood Risk and the U.S. Housing Market, Journal of Housing Research (2020)


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