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Using the market to fight climate change and hurricanes

Florida’s response to Hurricane Ian illustrates how governments complicate climate change adaptation by subsidizing the insurance market.

One of the classic retorts to concerns about climate change is the claim that people can move from highly vulnerable areas to safer ones. Maybe the world won’t be willing to accept hundreds of millions of climate change refugees, but in the United States, maybe people can move from storm-prone Florida to the northern Midwest, or to any location that may be appropriate, including safer parts of Florida. The United States, after all, has a long tradition of individual mobility. And many parts of the country have space and infrastructure for additional residents.

However, for such migration to have an effect on the costs of climate change, price signals must be active and relatively undistorted. That is, a certain set of market prices must induce people to leave one place for another. And policymakers have not let insurance markets do their job in this regard.

Currently, the property insurance market in Florida is in dire straits. This year, six affected insurance companies became insolvent and, for Florida, underwriting losses exceeded $1 billion in each of the past two years. Unsurprisingly, insurers either cut coverage in the state or left altogether. The end result is that homeowners have a much harder time getting coverage and find it much more expensive when they do. None of this should come as a surprise, given the immense damage caused by Hurricane Ian and previous storms.

Rising insurance prices are a potential market signal. And such incitement, if and when it comes, is harsh. Who wants to have to dig up roots and leave the house because they can’t get home insurance? Yet this is what at least part of adjusting to climate change looks like. And there are greater burdens in this world than moving from Naples, Florida, to Minneapolis, Minnesota, or even northern Arkansas.

Yet politics stifles market adjustments. Florida has a state-run insurer of last resort called Citizens Property Insurance Corp. Unsurprisingly, this insurer has its own financial troubles, and in May Governor Ron DeSantis oversaw an additional $2 billion in reinsurance support for the company’s efforts. In other words, the state government is stifling market signals that might entice some state owners to leave for drier pastures.

But don’t pin your hopes on the Florida gubernatorial election. DeSantis’ Democratic rival Charlie Crist criticized the governor for not doing more on the property insurance front and offered 90-day emergency insurance coverage for residents. This would further stifle market incentives.

It is easy to see why the political incentives go in this direction. Some people will pay exorbitant prices for insurance, or give up their homes and not leave the state – and then vote out the incumbents. Even if some people leave the state with minimal fuss (and don’t vote in the meantime), a dwindling population and tax revenue are hardly a recipe for political success.

Also note that property insurance generally does not cover flood damage, which is particularly relevant in the current circumstances. Florida property owners are therefore likely to seek assistance from the federal government. This in turn will raise the question of whether a politician can play rough when the potential for discontent is so high. Will President Joe Biden stand firm where DeSantis failed, or will he step in as Florida’s saviour?

Storms are the main problem today. But the isolation of market signals is a more general problem for climate change issues. There is a risk of drought in many parts of the country, for example, including the southwest. And many of those same parts of the country have underinvested in water conservation because they’ve been receiving water subsidies for so long.

Climate change is widely seen as an example of market failure, and it’s easy to see why, given that individuals and institutions don’t fully internalize the costs of their carbon emissions. Yet markets may be managing climate change better than their reputation suggests. There are many modes of market adjustment, and one of them is prices, including insurance prices. The sad truth is that politics currently does not allow markets to work. Americans are getting some of the markets worst features while being deprived of their best virtues.

More from Bloomberg Opinion:

• Insurance may not rebuild your home after a fire: Liam Denning

• Congress should stop consolidating beach houses: publishers

• The ocean is coming for the houses. It’s priceless: Jonathan Levin

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. He is co-author of “Talent: How to Identify the Energizers, Creatives and Winners in the World”.

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