The cost of disaster: Putting a price tag on climate change

In this era of apparently mounting natural disasters worldwide—many, such as floods from hurricanes, likely related to changing weather patterns linked to climate change—one might ask: How much do such disasters cost? How are the costs calculated?
In fact, someone has asked—analyzing not just the cost of the event itself, but the larger economic costs linked to build-up and often long recovery.

“The public focus [of a disaster] is on the moment, the trauma of the extreme event,” says John Mutter, Professor of Earth and Environmental Sciences, as well as International Public Affairs, at Columbia University’s Earth Institute. “The economic loss focuses on that moment, too—what was actually lost at the time.”

However, that loss to the economy—the chain of production, consumption and everything that goes into it—doesn’t happen in a moment, but actually begins after, he says, “with losses that go beyond the value of the built structures trashed at the time, beyond the capital asset loss, to a deeper economic loss that happens over time.”

Three-pronged process

The theory of calculating disaster costs is just developing, as natural disasters become more prevalent; business can incorporate principles from a three-pronged process into new strategic thinking on what disaster is and how it might affect particular sectors or individual companies.

In fact, a climate-related—or other--disaster is a process with three key parts: build-up, event and recovery.

The recovery period is where the really big losses occur, Mutter says, due to productivity losses, lost jobs, reduced spending on education and health care, among others. The challenge is to figure out how to speed up growth after the event itself—even to the point where the economy grows at a faster rate than before the disaster. That’s a tall order. And it’s virtually impossible to do in poor countries or regions, Mutter says.

When such a recovery has actually succeeded — that is, when the aftermath leads to a more robust economy than before the disaster — it’s done so in relatively rich economies, where the focus often is less on “getting things back to the state they were in before the crisis,” than on moving in another direction, along a different, newer, more innovative path than before, and sometimes even investing in a different location, where the actual disaster didn’t occur.

Next Page: How to speed up recovery