Based on the updated webpage, it appears that President Trump's EPA is taking climate change adaptation seriously. I am not surprised because the President owns major pieces of land in many coastal cities. This "self interest" of property owners has been one of my themes on the microeconomics o adaptation. Building on my 2010 Climatopolis book, I wrote a new piece for PERC titled "Climatopolis Revisited". In this blog post, I'd like to touch on a few academic themes that merit new research.
We need new research on the following topics;
1. How costly is migration? If sea level rise means that people must leave their Miami coastal area, how much consumer surplus do they lose? I believe that housing is a differentiated product and that while you may love your current house that a close substitute exists so that if you could move to it (and it is on higher ground) that you can continue to enjoy your life even in the face of serious sea level rise.
1' Returning to Sherwin Rosen's work on the demand for differentiated products, how substitutable are different geographic locations? Is Las Vegas a "close substitute" for living in Miami? If we lose some coast, what have we lost? In an age of Facebook and Google and air conditioning, are any geographic locations irreplaceable? While I love West LA, my son rarely goes outside. He could live happily anywhere. In our diverse population, do I or he better represent our population's taste for outdoor attributes? He just wants air conditioning and fast Internet.
2. How "stranded" are stranded assets? Yes, we have built durable real estate structures in areas that may now flood and vanish but no piece of capital lives forever. If these pieces of capital could be moved to higher ground, then we hold an option that we can exercise if sea level rise is severe. If we anticipate that Southern Manhattan will vanish then we can stop investing in maintenance for the assets that are stuck there and we won't lose much when they do vanish because they will have almost completely depreciated. Read my 2017 paper with Bunten on this topic.
3. Are Private adaptation and public adaptation efforts complements or substitutes? FEMA and NFIP need to be reformed to stop spatial moral hazard. Individual investors need to have more skin in the game so that if they want to live in a risky place, they need to bet more of their own $ and not be able to default on loans or wait for the government to bail them out.
4. Is Julian Simon Right ? As more people around the world seek adaptation solutions, how quickly will entrepreneurs generate new products (stilts for homes, floating schools) and how effective will these products be in offsetting Mother Nature's new risks. I only fear "unknown unknowns" but I don't know what they are!
5. Rational Expectations vs. Behavioral Economics --- As I argued in this note, climate change adaptation offers the ultimate test of these two schools of thought. Young scholars should design subjective expectations tests of whether people (and which people) are updating their beliefs as Mother Nature shows us her cards concerning new climate risks.
6. The Media and Persuasion --- the people who choose to read the NY Times are not a random subset of the nation. If everyone in West Virginia who voted for President Trump read the NY Times each day, would they update their views on climate change? How does the media influence our thinking and planning for this ambiguous threat?
UPDATE: I see that some people are asking the following question; "If a coastal home experiences a 50% reduction in value 25 years from now because of sea level rise, won't that bankrupt the family?
Answer #1; Many households have insurance policies that would partially cover such losses. I do believe that there needs to be FEMA NFIP reform so that households face more of this risk so that they invest in pre-cautions that lower flood risk.
Answer #2: Don't forget present discounted value calculations. At a 3% annual interest rate a dollar in the year 2042 is worth 48 cents today. Thus future damage is worth less in today's dollars.
Answer #3: If the household borrowed $ to pay for the house, the owner has a default option that protects it from large losses. So , if you buy a $600,000 house and you paid $150,000 as a down payment and borrowed the $450,000 in a bank loan; you can default on that loan if the home's value shrinks. The bank would take over the house and make investments to keep its new asset valuable.
Answer #4: Poor households do not purchase coastal real estate. They rent housing. The subset of Americans who choose to buy coastal real estate are mature investors. They are making a bet that the American coastline will remain a beautiful and safe investment. Nowhere is it written in the Constitution that you always win your bet. If such coastal buyers now regret their bet, they can sell right now to someone else who has a comparative advantage in mitigating sea level rise risk. Comparative advantage is an important idea and is relevant for climate adaptation.
More generally, for economist who want to explore coastal real estate economics read my Lego paper that will appear soon in the Journal of Housing Economics (joint with Devin Bunten).