Governments need to find better ways to finance a resilient tomorrow
This is an excerpt from "Building a Resilient Tomorrow: How to Prepare for the Coming Climate Disruption" by Alice C. Hill and Leonardo Martinez-Diaz. Copyright 2019 by Alice C. Hill and Leonardo Martinez-Diaz and published by Oxford University Press. All rights reserved.
On the third floor of the building that houses the U.S. Treasury Department hang portraits of the 76 former secretaries of the treasury, starting with Alexander Hamilton. The men in all the paintings are wearing jackets, some even waistcoats, except for one. The portrait of Hank Paulson, who served under President George W. Bush, is of a man standing in his shirtsleeves, shirt slightly untucked, sleeves rolled up, hands in his pockets, a look of amused puzzlement on his face. Paulson is unique not only for rejecting a formal pose. History will best remember him for having engineered the Bush administration’s response to the 2008 global financial crisis and for persuading Congress to approve the controversial Troubled Asset Relief Program. Depending on your political persuasion, the program either bailed out crooked banks at taxpayers’ expense and should never have happened, or it heroically averted another Great Depression, or both.
Less well known is that Paulson is one of a small handful of prominent Republicans who favor aggressive action to combat climate change. In 2014, long after leaving the Treasury Department, Paulson was asked about his personal strategy for talking to fellow Republicans skeptical of efforts to cut greenhouse-gas emissions.
Paulson knew only too well that bank bailouts — the use of public funds to rescue troubled financial institutions from bankruptcy — are deeply unpopular with the American public. Yet, he explained, no one who wants a future in politics can afford to turn his or her back on a disaster-stricken community. When a major natural disaster strikes, the government steps in and pays for a large share of the uninsured losses. As climate change makes extreme weather more frequent and natural disasters more severe, Paulson continued, the losses will stack up. Government debt will get bigger and bigger. "Climate bailouts," as Paulson termed the use of public funds to help affected communities recover and rebuild after a natural disaster, will become a regular fixture of national life. So if Republicans care about limited government, Paulson concluded, they should care about controlling climate change before it results in never-ending climate bailouts.
Recent history suggests Paulson was right. Between 2005 and 2008, Congress appropriated almost $130 billion to pay for natural-disaster damages, caused mostly by Hurricanes Katrina, Rita and Wilma. After Superstorm Sandy struck, in 2012, the government paid out over $50 billion. And following devastating wildfires and Hurricanes Harvey, Maria and Irma, in 2017, Congress made available almost $140 billion in emergency funding. Congress borrowed most of this money, adding to the growing national debt.
Even for the largest economy in the world, ever-larger climate bailouts are not a responsible solution to handling present and future climate impacts. They will cut deeper and deeper into vital areas of public spending, such as infrastructure, education and health care. They will feed a spiral of borrowing, leading to higher financing costs for the government and higher taxes. Escalating climate bailouts will accelerate the declining fiscal health of the country, which will make policy trade-offs a lot tougher for the next generation of Americans. For this reason, the U.S. Government Accountability Office (GAO), a trusted government watchdog that works for Congress, identified climate change as a "significant financial risk to the federal government." In 2013, the GAO added climate change to its annual list of issues that constitute the highest fiscal risk to the U.S. government. As of this writing, climate change is still on the list. For other nations, especially those in the world’s poorer regions, borrowing on this scale is not an option. The traditional approaches, hoping that foreign aid will flow sufficiently quickly and in adequate amounts or otherwise leaving needs unaddressed, are not good options either.
In the coming years, governments everywhere, including in the United States, will have to raise unprecedented amounts of money to cope with the impacts of climate change. Precise estimates are hard to find, but one review of the literature suggests that countries should already be spending between 0.67 percent and 1.25 percent of their annual gross domestic product (GDP) on resilience. Globally, that means hundreds of billions of dollars per year, and currently, countries may be underspending on resilience by as much as 70 percent.
How can communities raise the money needed, and how can they do so while keeping the financial strain as low as possible? They can fund resilience the old-fashioned way, through tax revenue, borrowing and buying reinsurance. For developing countries, securing more international assistance will be necessary. But governments must also deploy new ideas, including ... setting up special reserve funds, using value capture, raising funds from carbon taxes and cap-and-trade mechanisms and issuing green and catastrophe bonds. Climate bailouts, even for the richest nations, are not a smart way to grapple with the effects of climate change. We can and must do better.