CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENT

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CLIMATE CHANGE:THE FISCAL RISKS FACINGTHE FEDERAL GOVERNMENTA Preliminary AssessmentNovember 2016

Table of ContentsOVERVIEW. 5The Current Picture of Fiscal Risk . 5Expenditure Impacts . 6Revenue Impacts . 7The Fiscal Case for Climate Action . 9Understanding the Risk Assessments in this Report . 10Charting a Path to a Clearer Picture of Fiscal Risks. 11RISK ASSESSMENTS . 131. Crop Insurance . 142. AIR QUALITY AND HEALTH CARE. 203. WILDFIRE SUPPRESSION . 234. COASTAL STORM DISASTER RELIEF . 265. FEDERAL FACILITY FLOOD RISK . 29REFERENCES . 32

OVERVIEWPresident Obama has said the Budget is “a roadmap to a future that embodies America’s values andaspirations.” Building and stewarding such a Budget over the long term requires a clear-eyed view of thechallenges that put our aspirations at risk. No challenge poses a greater threat to future generationsthan climate change.The Office of Management and Budget (OMB), in collaboration with the Council of Economic Advisers(CEA), recently embarked on an effort to assess what we can quantify today with regard to the fiscalrisks posed by climate change for the Federal Government. To date, this effort has yielded two primaryconclusions: first, that our current understanding of the fiscal risks of climate change is nascent, limitedin scope, and subject to significant uncertainty; and second, that the evidence available thus farindicates the fiscal risks to the Federal Government could be very significant over the course of thiscentury without ambitious action to reduce greenhouse gas emissions (GHGs) and adapt ourcommunities to a changing climate.This report outlines the contours of fiscal risk through five program-specific assessments: cropinsurance, health care, wildfire suppression, hurricane-related disaster relief, and Federal facility floodrisk. These programs were assessed because they are directly influenced by climate change, they havestrong links to the Federal Budget, and quantitative scientific and economic models regarding the likelymagnitude of impacts were available. This report also considers potential impacts to Federal revenues.The Current Picture of Fiscal RiskClimate change is already affecting communities across the United States. The most recent NationalClimate Assessment (NCA) clearly established the sweeping effects of climate change, many of which arealready evident in the lives of Americans. Fifteen of the sixteen warmest years on record globally haveoccurred between 2000 and 2015, and 2015 was the warmest year on record (NOAA, 2016a). The trendis continuing in 2016, with each of the first eight months in 2016 setting a record as the warmestrespective month globally in the modern temperature record, dating to 1880. August 2016 marked the16th consecutive month that the monthly global temperature record was broken (NOAA, 2016b), whileSeptember 2016 was surpassed only by record-breaking September 2015 (NOAA, 2016c). In addition,heat waves, wildfires and some extreme weather events such as heavy rainfall, floods, and droughtshave become more frequent and/or intense in recent years. While scientists continue to refineprojections, it is clear that climate change will continue and its damaging impacts will intensify withoutconsiderable action to reduce GHG emissions and to respond with adaptive measures. Even withsignificant near-term emissions reductions, dealing with near- and mid-term impacts due to past andcurrent emissions will still pose challenges.The impacts of climate change will also affect the Federal balance sheet. For example, an increase in thefrequency of catastrophic storms will require more disaster relief spending and flood insurance payouts.Rising seas and heavy rainfall events will prompt investments to protect, repair, and relocate Federalfacilities. Changing weather patterns and extreme weather events will affect American farmers and theFederal programs that support their risk management. Climate impacts affecting the nation’s food,water, air quality, weather, and built and natural environments endanger the health of the Americanpeople and weigh on Federal health care programs. An increase in wildland fire frequency and intensity 5

CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENTwill place further strain on Federal fire suppression resources. Climate change shocks and stressorsworldwide pose global security risks and affect resource needs for defense operations andinfrastructure. Wide-ranging impacts will impede economic production and diminish Federal revenue.Although the presence of risk across these and other exposure points is clear, we remain in the earlystages of quantifying the total likely burden for American taxpayers. In several critical areas, quantitativeprojections of specific climate impacts are not yet available. The projections we do have are useful inapproximating the order of magnitude of potential impacts of climate change on the Federal Budget,but are still subject to significant limitations and uncertainty. As a result, because of these limitationsand because other impacts are not considered in this assessment, the total costs of climate change forthe Federal Government may be greatly underestimated, and other costs affecting the American peopleare not considered here. Despite these limitations, the accumulated evidence suggests the fiscal impactsof further unmitigated climate change could leave a significant imprint on the Federal Budget over thecourse of this century.Expenditure ImpactsOn the expenditures side of the Federal ledger, each of the five program-specific assessmentsconducted for this report unambiguously illustrates that climate change will raise expenditures. Thetable below shows estimates of recurring, annual expenditures due to climate change across four of thefive program areas—totaling 34- 112 billion per year by late-century, the equivalent of 9- 28 billionper year in today’s economy.Quantified Increases in Annual Expenditures Due to Climate Change in Modeled Scenarios aMid-CenturyMeanLo cHi cMeanLo cHi cWildland FireSuppression 1.3( 0.6) 0.8( 0.4) 2.0( 0.9)------ 0.6( 0.3) 19( 8.7) 0.1( 0.1) 11( 5.0) 1.5( 0.7) 31( 14.2) 2.3( 0.5) 4.2( 1.0) 7.7( 1.2) 50( 13.6) 1.2( 0.2) 0.1( 0.1) 0.6( 0.1) 32( 8.7) 5.0( 1.0) 9.3( 2.3) 19.7( 3.2) 78( 21.2) 21( 9.6) 12( 5.4) 35( 15.8) 64( 16.3) 34( 9.0) 112( 27.6)Crop Insurance dAir QualityHealth Care eCoastalDisaster ReliefLate-century mean Late-CenturyBillions of Real dollars(GDP-Adjusted) bTotal AnnualExpenditures fa The costs in this table are not predictions of the future; they are projections of costs that would be incurred by the FederalGovernment given a set of assumptions that form the scenarios modeled. See each assessment for more information.b Estimates represent snapshots of average annual expenditures due to climate change in the year(s) modeled for thisassessment. Topline estimates are in billions of real dollars. Below the topline estimates (in parentheses) are equivalent dollarestimates in today’s economy in terms of percent of U.S. GDP. Adjustment factors vary due to differences in years modeled.c The range between Lo and Hi estimates reflects only a portion of the uncertainty associated with cost estimates. Seerelevant sections of this report for more information.d Crop insurance expenditures were only modeled for the late-century time period (2080).e While the other three assessments compare an unmitigated climate change scenario to a scenario characterized by historicalweather patterns, the air quality assessment compares an unmitigated climate change scenario to a mitigation policyscenario. As discussed in the assessment, mid-century estimates may capture less than half of the full cost increase due tounmitigated climate change, while late-century estimates likely capture the vast majority of the increase.f Several likely areas of fiscal risk related to climate change have not yet been quantified. 6

CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENTEstimated costs reach into the tens of billions per year within just a few decades (2040-2060) and growinto late century (2060-2100). There is also evidence to suggest the costs incurred over the last decaderelated to extreme weather and fire have already been exacerbated by climate change.1 Climate-relatedcosts in these areas also appear likely to vary significantly from year to year, signaling the prospect ofbudgeting and other planning challenges and greater reliance on emergency supplementalappropriations. Even costs that represent a small portion of the Federal Budget can be severelychallenging for individual agencies without responsive adjustments to Congressional appropriations.In addition to these four program areas, OMB identified significant flood risks to Federal property afterreviewing just a sample of the Federal inventory—including 83 billion in Federal assets located in thecurrently defined 100-year floodplain, 23 billion in assets located in the currently defined 500-yearfloodplain, and 62 billion in coastal assets that would be threatened by inundation or otherwiseseverely affected at high tide under a 6 foot sea level rise scenario—but has not estimated the likelycosts associated with these liabilities over the coming decades.Although the combined weight of the quantified mean expenditure estimates in the assessments in thisreport reaches into the tens of billions to hundreds of billions per year by late-century, this is only anarrow window into the full fiscal risks of climate change. Fiscal impacts in several areas exposed topotentially significant climate risk are not quantified in this report due to data limitations and otherchallenges. Among these are health care related to vector-borne diseases and other climate changehealth impacts, national security, the National Flood Insurance Program (NFIP),2 transportation andwater infrastructure, and inland Federal asset flood risk.Revenue ImpactsRevenue impacts in an unmitigated climate change scenario appear to be significant. Climate change isprojected to reduce economic output in the United States and across the globe. Reduced output in theUnited States means lost revenue for the Federal Government. The Intergovernmental Panel on ClimateChange (IPCC)’s most recent midrange projection suggests that warming of four degrees Celsius overpreindustrial levels will occur by 2100 if global emissions are allowed to continue unabated. Economists’estimates of the economic damages (in terms of reduced consumption) from this level of warming,projected using integrated assessment models (IAMs) of the climate-economy system, range from 1 to 5percent of global gross domestic product (GDP) each year by 2100 (Nordhaus, 2013). One of the mostfrequently cited economic models places the estimate of annual damages from warming of four degreesCelsius at about four percent of global GDP (Nordhaus, 2010, 2013). That same model suggests thatlevels of warming that might occur by mid-century would result in lower annual damages—for example,an increase in 2 degrees Celsius could cause annual damages equivalent to about 1 percent of global1For example, according to NOAA, nearly 1 foot of sea level rise around New York City over the last century, largelydue to climate change, led to greater coastal flooding in New York and the surrounding region from SuperstormSandy than would have occurred a century ago (Rosenzweig, 2012). Superstorm Sandy prompted more than 49billion in appropriations to help communities rebuild. Wildland fire suppression costs have also increased as fireseasons have grown longer and the size and severity of wildland fires have increased, in part due to climate change(USDA, 2015).2A 2013 study conducted for the Federal Emergency Management Agency (FEMA) found that by 2100 the numberof NFIP policies would increase by 80-100 percent and the average loss cost per policy would increase by 50-90percent largely due to climate change (AECOM, 2013). However, legislative changes to the program since thisstudy was conducted may reduce the ultimate fiscal impact of these effects over time. 7

CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENTGDP—though there are many fewer estimates of climate damages for likely mid-century temperatureincreases (Nordhaus 2013).A number of factors affect the magnitude and the known uncertainties of such estimates. For example,the estimates do not account for important factors that remain difficult to quantify in physical terms andare inherently difficult to monetize, such as biodiversity loss, ocean acidification, changes in weatherrelated to changes in ocean circulation, increased severity of certain extreme events, tipping pointsassociated with non-linear changes in the climate, and heightened political instability as a result ofclimate impacts. In addition, current models factor in economic damages over time but treat the rate ofeconomic growth as if it is unaffected by climate change. A current debate in economics examineswhether higher temperatures will decrease the rate of GDP growth in some countries (Dell et al. 2012,Burke and Emerick 2016, Heal and Park 2016). If that is the case, the estimates from IAMs discussedabove could significantly understate the potential impact of climate change on global GDP over the longrun. Additional research suggesting that economic productivity is nonlinear relative to temperaturechanges—that there are significant negative temperature threshold effects on productivity in affectedsectors—also indicates that the IAM estimates of economic damages from climate change may beconservative (Burke et al. 2015).The uncertainty of economic damage projections is compounded when attempting to estimate theassociated potential for lost U.S. Federal revenue. The exercise relies on difficult assumptions about theU.S. share of global economic losses, the impact of economic losses on U.S. GDP, and Federal revenue asa share of U.S. GDP. For example, while economic losses are commonly expressed as a percent of globaloutput, some portion of those losses occur in the form of non-market losses (e.g., premature mortalityor biodiversity loss) that may not directly translate into lost GDP—or Federal revenue.One simple approach to the first assumption—the U.S. share of global losses from climate change—is toassume that this share would be approximately equivalent to the U.S. share of global GDP ( 22 percentof nominal global GDP in 2015). While the U.S. economy is growing faster than most other advancedeconomies, the U.S. share of global GDP is declining gradually over time, a trend expected to continue(IMF, 2016). In addition, although the United States has significant exposure to the physical impacts ofclimate change (Melillo et al., 2014), relative to many other strongly affected countries, high income andwell-developed institutions (such as insurance markets, as well as public and private resources foremergency preparedness and disaster response) will help the United States to manage those impacts(Kellenberg and Mobarak, 2007). Both of these factors suggest that the U.S. share of climate changedamages in mid- and late-century (expressed in terms of GDP) is likely to be lower than the current U.S.share of global GDP.For illustrative purposes, the figure below shows outcomes for lost Federal revenue in late-centuryunder a range of assumptions about global economic losses and the U.S. share of global losses, holdingFederal revenue constant as a share of U.S. GDP and assuming all economic losses translate into lostGDP. At the commonly cited four percent global economic loss estimate at four degrees Celsiuswarming, lost Federal revenue ranges from roughly 340 to 690 billion per year depending on theportion of global losses that occur in the United States—equivalent to approximately 60- 110 billionper year in today’s economy. These estimates are the product of a simple extrapolation from leadingeconomic loss projections and should be interpreted as indicative of the order of magnitude of potentiallost revenue, rather than precise estimates. 8

CLIMATE CHANGE: THE FISCAL RISKS FACING THE FEDERAL GOVERNMENTBillions of Real DollarsLost Revenue by Extent of Global Economic Losses1,00080060040020000%1%2%3%4%5%6%Global Losses (% of global GDP)U.S.Share10% U.S. Share10%15%20%1% 86 ( 14) 128 ( 21) 171 ( 28)15% U.S. ShareGlobal Losses2%3% 171 ( 28) 257 ( 42) 257 ( 42) 385 ( 62) 343 ( 56) 514 ( 83)20% U.S. Share4% 343 ( 56) 514 ( 83) 685 ( 111)5% 428 ( 69) 642 ( 104) 856 ( 139)Estimates are in billions of real dollars and (in parentheses) the equivalent dollar estimates in today’seconomy in terms of percent of U.S. GDP.The Fiscal Case for Climate ActionPrincipled fiscal responsibility clearly calls for smart investments today that can avoid significant costs inthe future. The evidence underscores the opportunity to significantly reduce costs by mitigating globalGHG emissions and adapting to climate change. For example, keeping global temperature rise wellbelow 2 degrees Celsius relative to pre-industrial levels, as reflected in the Paris Agreement, is likely tosignificantly reduce annual economic losses and U.S. Federal revenue losses from climate change bymid- and late-century, relative to more significant temperature increases. Similarly, as detailed in thisreport, mitigation would reduce by half the increase in crop insurance program costs due to climatechange. Air quality modeling also demonstrates that mitigation reduces the vast majority of the increasein air quality-related illnesses and associated Federal health expenditures. In an independent analysis,EPA also found that adaptation can significantly reduce climate change impacts—for example, avoidingtrillions of dollars of coastal property damages over the course of this century (EPA, 2015).Despite the conventional wisdom that reducing emissions will constrain economic growth, recent trendsand analysis demonstrate that the United States can achieve rapid emissions reductions whilemaintaining robust economic growth. In the United States, GDP has grown faster than most majoradvanced economies since 2010 (11 percent) while U.S. energy-related CO2 emissions have fallen byalmost 6 percent, leading to the first sustained period on record where GDP grew and emissions fell.While the correlation between economic

Climate change is already affecting communities across the United States. The most recent National Climate Assessment (NCA) clearly established the sweeping effects of climate change, many of which are already evident in the lives of Americans. Fifteen of the sixteen warmest years on record globally have

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