Low-carbon transition is improbable without carbon pricing

Unidad de excelencia María de Maeztu CEX2019-000940-MThis Letter has a Reply and related content. Please see: Reply to van den Bergh and Botzen: A clash of paradigms over the role of carbon pricing (https://doi.org/10.1073/pnas.2014350117) - Opinion: Why carbon pricing is not sufficient to mitigate climate change-and how "sustainability transition policy" can help (https://doi.org/10.1073/pnas.2004093117)

Methodological issues in natural disaster loss normalization studies

The mixed results in Pielke (2020) for natural disaster loss normalisation studies are due to methodological differences. Flaws exist in commonly used normalisation approaches that assume unitary elasticities between exposure indicators and losses. We refute Pielke’s arguments that statistical studies estimating these relationships are biased. We conclude with an agenda for future research

Default options and insurance demand

Default options may provide a low-cost way of influencing behaviour without modifying incentives and constraining choices between alternatives. However, an improved understanding is needed on whether they are effective when individuals have experience with making the choice in practice and have preferences for specific alternatives. We study whether defaults can be used to increase insurance coverage against low-probability/high-impact risks, like floods, and whether past flood insurance purchases and flooding experience moderate the effect of defaults. Our study uses a naturally occurring difference in experience, comparing the surveyed flood insurance choices of 1,187 homeowners, half of whom are in the Netherlands, where flood insurance penetration rates are low and recent flooding caused minor losses, and the other half of whom are in the United Kingdom (UK), where the opposite is true. We find defaults are effective amongst homeowners with little to no flood-related experience: in the Netherlands defaults increase the likelihood of insuring by between 17 and 18 percentage points. Although there is no overall effect of defaults in the UK, defaults increase flood insurance coverage for risk averse individuals, and those who have no reported previous flood experience and have not purchased flood insurance. Anticipated regret about not having insurance coverage in the event of a flood, and perceptions about the insurance cost explain between 34 and 37 percent of the relationship between the default and flood insurance demand. We discuss policy implications of our findings

A Review of the Financial Sector Impacts of Risks Associated with Climate Change

This article reviews the literature on the financial sector impacts of natural disasters and physical climate change risks, covering banking, insurance, stock markets, bond markets, and international financial flows. Most studies have applied statistical approaches to historical data from developed countries to identify these impacts, while some have also used theoretical and computational modeling to assess future risks under climate change scenarios. The findings show that natural disasters and climate change risks generally lower insurer profitability and risk-sharing capacity, bank stability and credit supply, returns and stability of stock and bond markets, foreign direct investment inflows, and international lending. Factors such as income levels, rigorous financial regulations, capital abundance, market diversification, and adaptation strategies mitigate the negative effects. Natural disasters increase remittance inflows and financial assistance to low- and middle-income countries. We recommend future research on forward-looking computational modeling to assess the future financial sector impacts of climate change, while accounting for adaptation actions and their drivers. Future research should also consider hazard correlations and the interactions between financial industries and regions to more comprehensively assess the economic effects of natural disasters in general and for vulnerable countries in particular

A stepwise approach for identifying climate change induced socio-economic tipping points

Climate change may cause socio-economic tipping points (SETPs), where the state of a socio-economic system abruptly changes to a fundamentally different state. While their potential existence is recognized, a systematic method for policy-relevant research on SETPs is lacking. This study introduces a stepwise approach for identification of SETPs that supports decision making under uncertain climate and socio-economic conditions. The approach is demonstrated with a stylized case study on the collapse of house prices (a SETP) in a coastal city, due to increasing flood risk from sea level rise. We explore four dynamic adaptive management strategies under a wide range of possible futures. We find that under scenarios with very high and rapid sea level rise, tipping points in real estate prices occur if the market responds to sudden changes in perceived flood risk rather than gradually adjusting prices to changes in flood risk in a rational manner. Such SETPs can only be avoided with a proactive strategy and when flood protection measures are implemented rapidly. Our approach can guide future studies on SETPs and seeks to move the study of SETPs towards a concept that provides perspective of action for policy makers

Climate policy without intertemporal dictatorship : Chichilnisky criterion versus classical utilitarianism in DICE

Unidad de excelencia María de Maeztu MdM-2015-0552Unlike discounting and the damage function, the social welfare function has not received so much attention in the debate on climate economics. An important challenge has been to combine efficiency and equity considerations in a single social welfare framework. The Chichilnisky criterion is one way to resolve this. We consider its implementation in the climate-economy model Dynamic Integrated Climate-Economy (DICE), and compare results for different damage functions, namely the standard one in DICE and the one proposed by Weitzman implying potential large climate damages at high temperature increases. We calculate optimal climate policy for different parameter settings and compare the results with those under the green golden rule (only final utility matters) and classical utilitarianism (no discounting). Optimal emission abatement trajectories turn out to be very different between standard discounted utilitarianism, classical utilitarianism and Chichilnisky specifications. The results are very sensitive to the damage function, the climate sensitivity parameter and especially the "Chichilnisky weight" given to utility of generations in the far future. We discuss conditions and reasons for preferring either classical utilitarianism or the Chichilnisky criterion, and conclude that a critical factor is the time horizon used in climate policy analysis. Adopting sustainable preferences as formalized by the Chichilnisky criterion in climate policy analysis has the advantage that the very long-term implications of greenhouse gases in the atmosphere on the environment and human welfare are not downplayed

Who bears the indirect costs of flood risk? An economy-wide assessment of different insurance systems in Europe under climate change

Anticipated increase in future river flood risk highlights the need for effective flood insurance, as it enables hedging against this risk. However, its design varies significantly across countries. This study contributes to the debate on designing flood insurance mechanisms from an economy-wide perspective, considering both socioeconomic and climate changes. We apply a multi-regional computable general equilibrium (CGE) model for 2050 and find that, under current insurance market systems, flood risk causes regional GDP losses of up to −0.5%, societal welfare losses of up to −1%, and private and public consumption losses of up to −0.5% and −2.4%, respectively. These estimates are all relative to a scenario without flood risk. Our results indicate that flood risk intensifies pressure on public budgets. We find that insurance market reforms, including a higher degree of risk-sharing, mandatory purchase requirements, and public reinsurance, can alleviate adverse welfare effects and the burden on public budgets

Individual hurricane evacuation intentions during the COVID-19 pandemic: insights for risk communication and emergency management policies

The U.S. 2020 hurricane season was extraordinary because of a record number of named storms coinciding with the COVID-19 pandemic. This study draws lessons on how individual hurricane preparedness is influenced by the additional risk stemming from a pandemic, which turns out to be a combination of perceptions of flood and pandemic risks that have opposite effects on preparedness behavior. We conducted a survey in early June 2020 of 600 respondents in flood-prone areas in Florida to obtain insights into households’ risk perceptions and preparedness for the upcoming hurricane season under COVID-19. The results show that concerns over COVID-19 dominated flood risk perceptions and negatively impacted people’s evacuation intentions. Whereas hotel costs were the main obstacle to evacuating during Hurricane Dorian in 2019 in the same geographic study area, the main evacuation obstacle identified in the 2020 hurricane season is COVID-19. Our statistical analyses investigating the factors influencing evacuation intentions show that older individuals are less likely to evacuate under a voluntary order, because they are more concerned about the consequences of becoming infected by COVID-19. We observe similar findings based on a real-time survey we conducted in Florida with another group of respondents under the threat of Hurricane Eta at the end of the hurricane season in November 2020. We discuss the implications of our findings for risk communication and emergency management policies that aim to improve hurricane preparedness when dealing with additional health risks such as a pandemic, a situation that may be exacerbated under the future climate

Regional Inequalities in Flood Insurance Affordability and Uptake under Climate Change

Flood insurance coverage can enhance financial resilience of households to changing flood risk caused by climate change. However, income inequalities imply that not all households can afford flood insurance. The uptake of flood insurance in voluntary markets may decline when flood risk increases as a result of climate change. This increase in flood risk may cause substantially higher risk-based insurance premiums, reduce the willingness to purchase flood insurance, and worsen problems with the unaffordability of coverage for low-income households. A socio-economic tipping-point can occur when the functioning of a formal flood insurance system is hampered by diminishing demand for coverage. In this study, we examine whether such a tipping-point can occur in Europe for current flood insurance systems under different trends in future flood risk caused by climate and socio-economic change. This analysis gives insights into regional inequalities concerning the ability to continue to use flood insurance as an instrument to adapt to changing flood risk. For this study, we adapt the “Dynamic Integrated Flood and Insurance” (DIFI) model by integrating new flood risk simulations in the model that enable examining impacts from various scenarios of climate and socio-economic change on flood insurance premiums and consumer demand. Our results show rising unaffordability and declining demand for flood insurance across scenarios towards 2080. Under a high climate change scenario, simulations show the occurrence of a socio-economic tipping-point in several regions, where insurance uptake almost disappears. A tipping-point and related inequalities in the ability to use flood insurance as an adaptation instrument can be mitigated by introducing reforms of flood insurance arrangements