The cost of climate change

What is the price of not responding to the climate crisis? Professor Ilan Noy is calculating the cost of climate change and how to manage the economic impacts.

Economics of disasters

Professor Noy is Chair in the Economics of Disasters and Climate Change in the University’s Wellington School of Business and Government, where he researches the economic consequences of everything from climate change to earthquakes to COVID-19.

Events like floods, droughts, and storms cause a lot of damage to societies and economies, but how can we quantify the role of climate change in the impact of these events?

“The climate crisis is changing the frequency of these events, and they are becoming more intense and more damaging to the economy,” says Professor Noy.

Combining an economic assessment of damage from natural disasters with atmospheric science assessment of the increased probability these events will occur, he calculates the current economic impacts of a changing climate.

“We can measure exactly the climate change footprint of floods in New Zealand, for example, in terms of economic damage.”

In the United States, Professor Noy and colleagues applied the same approach to Hurricane Harvey, which hit Houston, Texas in 2017. The storm was a Category 4 that caused massive flooding and around $90 billion in damage. Roughly two-thirds of this cost ($67 billion) was associated with climate change.

Uninsurable communities

Insurance companies use the term ‘Act of God’ for events that are beyond human control and that cannot be predicted, anticipated, or prevented. Storms, droughts, and floods are all traditionally thought of as Acts of God—but should the reality of climate change modify our thinking on this?

As scientific evidence shows, the way we live is a significant contributor to the climate crisis. Does that mean these events are actually within our control? This raises big questions for each of us, for the companies we buy goods from, for our governments, and for insurance companies.

“Within a few years we will live in a world where some communities will not be able to purchase insurance.”

What happens when a community becomes uninsurable? Does the government provide insurance for flooding, for example, because the private sector perceives the risk to be too high and doesn’t want to insure anymore? This is the stance taken in countries such as the United States and the United Kingdom where national flooding insurance programmes exist.

“These programmes basically socialise the risk of flooding, meaning taxpayers are paying for the risk of flooding.”

Professor Noy and colleagues are working with the New Zealand Government to assess the current economic impacts of climate change and identify preventative measures.

A costly retreat

With many major cities around the world being situated on the coast, the potential damage from rising sea levels is significant.

In the Asia-Pacific region, the looming threat of inundation has already led to an announcement by the Indonesian Government that the capital will be moved from Jakarta to an inland location on the island of Borneo.

“Jakarta is lower than sea level and flooding events are increasing dramatically, so the move is about avoiding that risk. But the price tag on this is humungous. It will cost tens of billions of dollars, which is an example of the price of the climate crisis.”

Despite the projected costs, Professor Noy says that prevention is better than dealing with the aftermath of disasters and makes sense economically. Politically, it may be far more difficult to convince a community to abandon their homes and retreat from the coast.

“Although the cost of this for a country like New Zealand is not insurmountable, it is significantly less than the recovery from the Canterbury earthquake.”

In Christchurch, 20,000 people were relocated from affected areas following the 2011 earthquake and compensated by the government, in a move that Professor Noy says was “handled ably”.

“We need to start thinking about similar policies for the impacts of climate change. Our quantification work is important because policymakers need to understand what will happen, and what it will cost if we ignore these issues.”