What will happen when sea-level rise, wildfires, droughts, and floods begin to erode the tax base that cities and towns will use to pay for seawalls, firebreaks, and other expensive projects that could help them prepare for climate change? Financial markets have already begun to price in the probability of such disasters, and that will make future adaptation efforts more expensive and drive inequity, said Jesse M. Keenan in a May 10 presentation hosted by the Graduate School of Design (GSD). Even worse, he emphasized, there will not be enough funding to pay for it all.
“Wake Up”
Keenan’s talk, benignly titled “Financing Climate Adaptation,” might more aptly have been called, he said, “Wake Up Massachusetts, You’re Already Paying for Climate Change”—an exhortation that in fact applies “all across the United States.” He cited “robust empirical evidence” that markets are responding to assessments of climate-change risk, and warned that commercial and residential property owners will shoulder the economic burden of higher financing costs.
Cities and towns typically rely on future tax revenues to fund capital projects—whether for construction of schools or seawalls—by issuing bonds to long-term investors. A typical term for a municipal bond issue might be 30 years, so investors are already assessing the risk to about 2050, when the relative sea level along the East coast of the United States, for example, is anticipated to be 10-14 inches more than today, according to the most recent projections of the National Oceanic and Atmospheric Administration (NOAA). This change in sea height is expected to lead to moderate, typically damaging flooding 10 times as frequently, and major, often destructive flooding, five times as often. “Failing to curb future emissions,” according to NOAA, could lead to sea level rise of three and a half to seven feet by the end of this century.
How will the United States deal with the escalating damages that implies by 2100? The economic scale of the required economic adaptation during the eight decades, Keenan said bluntly, is “beyond anything the public sector could possibly afford to fund.” Furthermore, of all the world’s largest economies, the United States is the only one without a national climate adaptation plan. “The collective strategy on adaptation…,” he said, “is nowhere near as comprehensive as you might think,” largely organized around “disaster response recovery, pre-hazard mitigation, with some measures to develop infrastructural resilience.” Recent legislative measures such as the Bipartisan Infrastructure Act, and more recently, the Inflation Reduction Act, Keenan explained, focus on decarbonizing the economy by incentivizing mitigation.
“The Rich Are Going to Adapt”
Incentives for adaptation do exist, he said, “but they originate in the private sector, not necessarily in the public sector.” The implication is that “the rich are going to adapt. Rich counties, municipalities, people, wealthy companies, and those with accumulated capital adapt. And we risk maladaptation for everyone else.” He quoted from the March 2023 Economic Report of the President: “Government action that targets constraints and market failures that impede adaptation should be most effective in supporting and enabling private action rather than crowding out actions that would have occurred anyway.” The translation, said Keenan? “You are on your own. Good luck. The government is not willing to crowd out adaptation investments,” he explained, “that would otherwise have happened at the level of households, local government, various financial stakeholders and investors.”
A 2020 study that examined the impact of sea-level rise (SLR) on coastal Massachusetts communities’ finances projected that five to 10 percent of a typical municipality’s budget is at risk. (At the extreme, the study estimated that 22 percent of Cambridge’s revenues will be jeopardized.) Modeling six-foot higher seas—not the high end of estimated SLR by 2100 based on the current trajectory of greenhouse gas emissions—Keenan described the work as a “conservative estimate” from an economic perspective because the study measured chronic inundation (properties underwater) rather than “effective economic inundation,” which will occur much sooner. When a property, or the infrastructure that supports it (a road, for example), floods about 20 times a year, the market treats it as “effectively inundated,” he explained, leading to “a huge loss in value.” Even properties that are on high ground, he said, will be devalued if they are served by a main road or infrastructure that floods. Critically, the study found that beyond an SLR of about three feet, the costs will increase faster than any municipality’s ability to keep up: “When it comes, it hits very fast.” As SLR accelerates beyond three feet, said Keenan, “You don’t have a lot of lag time.” Keenan also pointed out that in the competition among coastal Massachusetts communities for limited capital to finance climate adaptations, cities like Boston, as bigger, more familiar credits, are likely to absorb most of the available resources.
“This is what keeps me up at night,” he continued, “in terms of the property-tax base, people’s wealth caught up in these properties, and what this means culturally, institutionally, financially, and politically—on so many levels.” Almost a decade ago, he was speaking with a Wall Street bond trader who was considering whether to buy a bond being issued by the aqueduct authority in Key West. With just 10 minutes to make a decision to invest, the trader pulled up a map of the low-lying area, checked a sea level viewer, and decided that he would pass. “When a big buyer passes on a bond like this,” generally speaking, it could lead to higher borrowing costs, Keenan pointed out. Since then, the conversation between credit rating agencies and municipalities has been “maturing quite fast.”
Depreciating Properties at Risk
Buyers and lenders have taken note, too. A 2019 study found that coastal properties in a zone at risk of six feet of SLR sold at a 7 percent discount relative to other similarly situated U.S. properties. Multifamily assets, typically purchased by investors who are more savvy to exposure risk than typical homeowners, were discounted even more heavily. New construction is also more constrained in areas where residents understand climate change risks than in areas dominated by climate change skeptics. This difference in beliefs does not follow political divisions, said Keenan, but rather levels of education.
Wildfires have price effects similar to those attributable to sea-level rise. Proximity to a prior forest fire leads to discounting of home values, particularly in urban areas. “Simply having a view of the forest fire area,” he said, even if it is miles away, “lowers your property value.”
Mortgage lenders underwriting home purchases in at-risk areas have begun tightening lending standards, Keenan reported. While they are obviously worried about payment default, they are also, less intuitively, concerned aboutprepayments, which erode the value of their investments. In areas hit by hurricanes, for example, insurance payments after a disaster enable homeowners to pay off their mortgages. To guard against this prepayment risk, lenders are pushing more borrowers into federally-backed (FNMA and FHLMC) loans, thus transferring risk to the federal government. Small community banks, which may have better information than national lenders about local flooding risks, are also more likely to sell off loans, either to the federal government or capital markets, rather than keep them on their own balance sheets.
The insurance market, Keenan continued, is sending similar signals. The average projected 2023 rate increase for property insurance in Florida is 40 percent, and even more in Louisiana—with serious implications for working-class Americans. There are also certain properties that no private insurer will cover, and then the states step in, as insurers of last resort.
“What To Let Go”
What smaller communities can and should do, he said, is align their capital plans with long-term spatial planning, which will involve difficult conversations about “what to protect and what to let go.” Part of that process will involve better communication of public information—the way Japan has broadcast tsunami zone risk with signage and other forms of public and artistic communication. Concluding his thoughts, Keenan recalled the remarks of the mayor of a small town in Florida, who said “‘The true mark of climate leadership is letting people down in increments that they can absorb.’” Conversations about “the trade-offs—what you get and what you give up—are critically important.”
Keenan—who has advised U.S. government agencies, governors, mayors, Fortune 500 companies, and international NGOs about climate risks to the built environment—is the Favrot II associate professor of sustainable real estate at Tulane University in New Orleans. Formerly the GSD’s area head for real estate and built environment, and a fellow of science, technology, and public policy at the Harvard Kennedy School, he spoke as part of the lecture series, “Cape Ann Conversations,” which began April 5 with a talk about how climate change has altered hurricane risks, and will continue this fall with a talk on disaster preparation. The lectures are part of a multiyear climate-adaptation project run by the GSD’s Office for Urbanization that is exploring potential impacts to a single exemplary coastal region of Massachusetts: Cape Ann, a rocky peninsula 30 miles northeast of Boston that includes the city of Gloucester. The project, led by research associate and lecturer in landscape architecture Kira Clingen, has been collaborating with local community groups and governments to assess a variety of strategic responses to local climate change impacts, ranging from carbon mitigation to resilience planning and adaptation.
