The Economic Canary in the Climate Change Coal Mine

We hear a lot about climate change in the context of natural disasters or other environmental costs such as extinction of species. And whenever some super-sized weather event like Hurricane Dorian roles around, we’ll debate how much of a role climate change played (answer: a lot!).

But there is far too little attention being paid to what climate change is already doing—and in the short term, will do—to our economy. And to figure that out, you need to look no further than the insurance industry. In California, homeowners in wildfire-prone areas, are finding it difficult-to-impossible to get fire insurance for their homes. As climate change has made the fires more frequent and more intense, the risk of insuring homes has grown substantially. So, either these homeowners can’t get any insurance, or the premiums are beyond their budgets.

You might say: So what? Tough sh&^ for them. They shouldn’t own a home where there is a great fire risk. Maybe this will cause them to move to an area where the fire risk isn’t so great.

But here’s the thing. They can’t move. Why? Because now they can’t sell their homes. To buy a home, you need a loan from a bank. To get a home loan from a bank, you need to insure the home you’re buying as collateral. No insurance, no loan.

And don’t think the banks are in the clear here. In these areas, they’re still stuck with a bunch of uninsured homes as collateral for loans they’ve made which now have an ever-increasing risk of being burned down. Oh, and guess what this phenomenon is going to do to the value of these homes? Banks will now hold $500,000 loans on homes that will likely be worth pennies on the dollar and for the full term (30 years) of the loan.

Now, project forward what this will do to the construction, realty, and commercial real estate industries. Not pretty. And, this isn’t just for areas vulnerable to fires. Hurricane and flood prone areas will see something similar. Ugh.

If there is any good news, it’s that the insurance industry can be the catalyst for definitive action to combat climate change. If we’re smart, that is. . . which, so far we haven’t been.