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By Leslie Kaufman
What makes a disaster? When we think of
calamity, most of us think of flood waters that submerge towns, or
hurricane winds that shred buildings. The U.S. federal government uses
another kind of measure to decide whether an act of nature becomes an
official disaster: its cost.
In deciding when to dole out federal
assistance, the Federal Emergency Management Agencylooks to see if
per capita damage to uninsured assets exceeds a certain threshold; for
2021, that would be $1.55 per person in a
state. The agency has a proposed rule to update that
number to $2.33 per person and then index it to the consumer price index
Why should anyone care about that 80
cents? The answer is climate change.
A warming climate is contributing to more
and bigger disasters. But human beings are stubborn. We continue to live
and build in risky areas just like nothing is happening. Proverbial frogs
in the boiling pot.
One of the best ways to make the costs of
climate change more transparent is to price the rising risk into insurance
policies. Private insurers and reinsurers are very sophisticated at
guessing when things will go wrong and charging customers accordingly.
Customers can refuse to pay the higher price, but if a disaster strikes
they will bear the cost. Eventually the true cost of living by the ocean or
in a wildfire zone becomes apparent.
It is an effective feedback loop, but
brutal — which is where the federal government comes in. To greatly
simplify the history here: As disasters have increased in certain
areas, private insurers found flood insurance in particular too risky, and
sent premiums sky-high. The federal government stepped in to provide
subsidized flood insurance, racking up tens of billions of
dollars in debt for covering claims.
But the government hasn’t just covered
the claims of individuals; it’s also covered the claims of cities, states
and some nonprofits through the Robert T. Stafford Disaster Relief and
Emergency Assistance Act.
Helping local governments recover from a
public disaster might seem like an unalloyed good, but for a long time
federal officials have argued that it creates perverse incentives for the
localities to under-insure, knowing that in the end they’ll never have to
pick up the cost.
There are some areas, like debris
clean-up and utility repair, where this argument doesn’t really apply
because localities would have a hard time getting insurance. But there is
one category assistance in the Stafford Act that is particularly
controversial because private insurers are downright eager to cover these
areas: Category E applies to buildings, their contents, vehicles and
of school buses, court buildings and even churches.
A January analysis by the
Homeland Security Operational Analysis Center looked specifically at
whether states and localities were under-insuring for Category E. It found
that while most of the states and localities did have some insurance, the
proportion of overall building repair costs covered by insurance has only
been 28% over the last decade or so. In other words, Uncle Sam has been on
the hook for 72% of repairs. And according to an analysis by Hagerty, an
emergency management consulting firm, Category E has historically
accounted for the largest chunk of FEMA’s assistance obligations.
Craig Fugate, who ran FEMA under the
Obama administration, sees in these numbers not just under-insurance “but
rather a wholesale risk transfer.”
The concern is that this risk transfer
will beget even bigger bills down the line. Without an incentive to
purchase expensive insurance, states, cities, and tribes are largely
shielded from the most immediate costs of a warming Earth. If towns had to
pay for real risks, they would have a financial incentive to place new
buildings and bridges out of harm’s way. Instead, towns, eager to return to
normal after a disaster, rebuild again in the same spots. (By law, FEMA can
make them elevate the new properties, but not move them.)
There are endless examples of FEMA money
that’s been used to rebuild in an area that’s very likely to flood in the
future, from prisons and airports in Louisiana to public schools in New
York City. This is important not just because of the expense of immediate
replacement, but also because town planning and infrastructure often
dictate where private residences and businesses are built. “If the state
locals aren't internalizing the costs of these risks, you totally get the
wrong incentives to encourage development in certain areas,” said
Lloyd Dixon, a co-author of the Homeland Security report and a senior
economist at the RAND Corporation.
Within FEMA, there is relatively broad
agreement that something needs to change about the current federal regime.
The White House’s fiscal year 2021 budget proposed ending Category E
Such a position was, understandably, very
unpopular with states and the proposal didn’t make it very far. That’s
where the current rule comes in. It won’t eliminate Category E, but it does
raise the threshold for state assistance. Not only does it raise the per
capita minimum by 80 cents; it also raises the total minimum storm damage
from $1 million to $1.5 million, a number that will also be indexed to
inflation going forward.
In theory, over time as the thresholds
increased, the number of storms covered would decrease and states and
localities would be forced to have a more robust insurance practice. “They
can either use their own budgets, or increase their use of insurances to
cover risk,” Fugate said.
But former FEMA administrator Brock Long
is skeptical. He argues that raising the threshold for disaster
assistance might just force states to look for even more uninsured assets.
He says FEMA can’t fix the problem with just rule-making.
“The Stafford Act was innovative when it
was introduced in 1979 but it did not encompass climate change,” he said.
“It is time for Congress to consider legislative changes that reward
communities for doing the right thing,” he continued, “things like proper
building codes and reinsurance capabilities need to be incentivized not
Colin Foard, who studies this issue for
the Pew Charitable Trust, has a similar view. He says cities and states
desperately need the money from the federal government to prepare for the
future. If they want to reform the current problem, they shouldn’t spend less, he says. They
should just spend differently, perhaps mandating that Category
E funds go toward buildings that are disaster resistant. “Every dollar
spent on mitigation can save 6 in recovery,” he said. “So if
the federal government wants to do something about this, there is a
more strategic way to lower everyone’s costs.”
Because cities are uniquely vulnerable to
climate change, they’re also likely to be remade the fastest by the
human need to survive and eventually thrive on a warmer planet. Of the
100 most environmentally vulnerable cities, 99 are in Asia. Yet,
globally, cities aren’t making the most
important investments needed to tackle global warming.
Paul Buckingham, an electrical engineer
in the U.K., has been taking thermal images to persuade home- and
business-owners to invest in efficiency. For example, his heat camera shows
where London is succeeding and failing at
Station: London black cabs leave their engines on as they wait for
passengers in front of the Camden metro station and become constant
emitters of heat and air pollution.
Photographer: Thermal Image by Paul
Buckingham for Bloomberg Green