USA - The Perverse Incentives of Federal Disaster Aid

Experts worry that some federal disaster aid is actually creating perverse incentives for cities and states — and deterring them from making better climate policies.

What makes a disaster? When we think of calamity, most of us think of flood waters that submerge towns, or hurricane winds that shred buildings. The U.S. federal government uses another kind of measure to decide whether an act of nature becomes an official disaster: its cost.

In deciding when to dole out federal assistance, the Federal Emergency Management Agency looks to see if per capita damage to uninsured assets exceeds a certain threshold; for 2021, that would be $1.55 per person in a state. The agency has a proposed rule to update that number to $2.33 per person and then index it to the consumer price index going forward.

Why should anyone care about that 80 cents? The answer is climate change.  

warming climate is contributing to more and bigger disasters. But human beings are stubborn. We continue to live and build in risky areas just like nothing is happening. Proverbial frogs in the boiling pot.

One of the best ways to make the costs of climate change more transparent is to price the rising risk into insurance policies. Private insurers and reinsurers are very sophisticated at guessing when things will go wrong and charging customers accordingly. Customers can refuse to pay the higher price, but if a disaster strikes they will bear the cost. Eventually the true cost of living by the ocean or in a wildfire zone becomes apparent.

It is an effective feedback loop, but brutal — which is where the federal government comes in. To greatly simplify the history here: As disasters have increased in certain areas, private insurers found flood insurance in particular too risky, and sent premiums sky-high. The federal government stepped in to provide subsidized flood insurance, racking up tens of billions of dollars in debt for covering claims.

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