In case you missed it - ‘Disaster Risks in the Age of Climate Change’Seminar
For those who were unable to attend, we compiled the key takeaways of the presentation given by Harrison Hong, professor of Economics at Columbia University.
According to Hong, the global costs of weather disasters have risen significantly in the past decades. “The world is growing, so there is obviously more capital that is at risk from disasters, but client scientists are increasingly confident that this trend is due to global warming. If you project out 50 -100 years, there is a lot of scientific evidence that the weather disasters are going to get worse.” For example, the present value calculation for tropical cyclone loss, which effects many parts of the world and particularly in less developed countries, is estimated to be between 3.9 and 15.5 trillion USD.
Hong explained that while most of the discussion on climate change is focused on emissions control and carbon taxes, “I would emphasize that even if this was implemented today, it won’t help us to cope with disasters for many decades because these instruments are simply meant to keep the climate change problem at bay. It doesn’t reverse the problem. Weather disasters are going to pose a much bigger threat going forward. And we also know that the welfare loss from a utility perspective is going to be high. This is for two reasons: 1) weather disaster damage to capital stock is permanent – once these buildings get wiped out they are gone 2) we also know that households tend to have risk averse preferences that magnify the welfare losses.”
Therefore, disaster mitigation on a regional level, such as sea walls and land-use zoning, will play a prominent role.
Hong listed three key questions for investors:
- What determines mitigation?
- How valuable is it for social welfare?
- What are the tax and asset pricing implications?
Hong sets out to answer these questions by modelling regional-level mitigation to limit fat-tailed damages to capital stock. The model reflects the fact that the value of this mitigation is going to change every time a disaster arrives because, as Hong said, “it shifts people’s belief in about whether global warming is going to more frequent disasters.” Additionally, there is an under-provision of mitigation in competitive markets due to externalities – “every time levy or a sea wall is built, a positive externality is created for the rest of the people in the region; due to competitive markets, there will be an under-provision of these mitigation tactics.”
Hong’s uses this model to quantify the value of mitigation in the context of Atlantic hurricane arrivals on the East coast of the United States.
Access Webinar 2, ‘Disaster Risks in the Age of Climate Change’, via: https://player.vimeo.com/video/465138134