Florida has had the misfortune to be hit by two hurricanes just weeks apart. Alongside the tragic death toll, comes billions of dollars’ worth of economic damage. Hurricanes, and other extreme weather events, are increasingly economic events too. According to insurance modelers, Hurricane Milton is likely to result in claims worth around $36B whilst the earlier Hurricane Helen could see claims worth around $6B. As not all costs will have been insured, the total level of economic damage is likely higher.
The National Oceanic and Atmospheric Administration (NOAA) is the best source of data on the economics of extreme weather in the United States. Worryingly, such extreme and economically damaging weather events are becoming more frequent.
NOAA keeps a count of ‘billion dollar’ weather events, those which result in damages that cost more than one billion dollars to make good, and, usefully, track this measure utilizing CPI adjusted dollars to take into account inflation over the decades. As of September 10th this year, so before both Helen and Milton, twenty such events had been experienced in 2024 so far. 2023 saw 28 such events, the most in any calendar year since the data series began in 1980. The average annual number of billion-dollar events since 1980 has been just 8.8 per year but that long-term average marks a steep change by decade. Back in the 1980s, billion-dollar weather events occurred at an average rate of just 3.3 per year. In the 1990s that rose to 5.7 per year and in the 2000s to 6.7 per year. In the 2010s, though, the rate climbed to 13.1 per year and, over the last five years, it has jumped again to an average of 20.4 per year.
Not only has the frequency of such events risen sharply but so too has the average cost in inflation adjusted terms. Back in the 1980s billion-dollar weather events cost an average annual figure of $20.8B. By contrast, the figure for the 2010s was $99.3B.Over the last five years, annual cost has averaged $123.5B. Even in the context of a $27 trillion economy, such costs are hard to ignore – and especially when they tend to be concentrated in geographic regions. More than half of NOAA’s billion-dollar extreme weather events take the form of hurricanes and tropical storms and hit the southern United States.
Climate change makes such storms more destructive as warmer air temperatures allow more vapor to be absorbed, leading to heavier rain falls. Meanwhile, lower ice caps produce higher sea levels making storm related surges result in higher levels of flooding. Changes in nature though cannot explain the entirety of the rising cost of extreme weather. An additional, and possibly more important factor, is ever higher levels of economic activity taking place in areas at risk of flooding. As more Americans move to Florida, and other potentially exposed states, the number exposed to flooding risks will rise and so will the cost of extreme weather events. Florida’s population has risen by more than 40% since 2000, compared to population growth of closer to 25% in the United States as a whole over the same period.
The journal Nature starkly exposed the numbers in 2022.
We use gridded maps of population from the US Environmental Protection Agency (EPA) to calculate the current population exposed to floods, and the EPA’s gridded projections of 2050 populations under the SSP2 scenario to analyse the relative contributions of climate change and population growth to future US flood risk (Fig. 4a). The average annual exposure (AAE) of the current US population to flooding is 3.63 million (1.18%). Climate change is projected to increase the AAE of present populations to 4.31 million (1.41%), an increase of 18.6%. Meanwhile, population growth alone in a static climate (that is, no future changes in flood hazard) would result in a 72.6% increase to an AAE of 6.27 million by 2050. This corresponds to 1.60% of 2050’s projected population, indicating that future development is projected to disproportionately intensify in hazardous areas (given that the present-day proportion is 1.18%). Without policies to direct new development into safer areas, the contribution of population growth to future US flood risk exceeds that of climatic changes. Population growth alone accounts for 74.7% of the increase in AAE to 2050, while climate change represents 19.1% of the change. (Author’s emphasis)
Hurricanes and other extreme weather events then are likely, on current trends, to become ever more economically destructive. The economics of such events are worthy of study. Thankfully the Clark Center US Experts Panel turned their attention to the topic back in 2022.
The results make for interesting reading. The broad view of the panel was that even destructive and costly events such as Hurricane Ian were unlikely to lower GDP after five years – economies do rebuild. More interesting were the questions on insurance.
Asked whether “the prospect of further costly extreme weather events means that there is a substantial chance that some private property insurance markets will no longer exist in ten years in states such as Florida”, 70% of respondents – weighted by confidence – either agreed or disagreed. This, of course, raises an important question for public policy and the role of government in filling the insurance gap.
Equally crucially, and very much in line with the warnings of Nature, the panel was asked whether “without large government subsidies, mandated flood insurance requirements would substantially reduce losses from subsequent natural disasters by encouraging economic activity to migrate from the most flood-prone areas”. More than 90% of respondents – again weighted by confidence – either agreed or strongly disagreed.
People respond to prices. If those living in areas at risk from natural disasters were forced to face the true costs of insuring against disaster then many would choose to relocate. By shifting economic activity away from risk areas, the overall cost of damages from extreme weather could be lowered.
