Climate Change: Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce Fiscal Exposure
Released: 2017-10-24T00:00:00

Letter

Background

Agencies across the federal government, such as the National Oceanic and Atmospheric Administration and the National Aeronautics and Space Administration, collect and manage many types of climate information, including observational records from satellites and weather monitoring stations on temperature and precipitation; projections from complex climate models; and other tools to make this information more meaningful to decision makers. Such information includes the following: Information and analysis about observed climate conditions. This includes information on, for example, temperature, precipitation, drought, storms, and sea level rise and how they may be changing in the local area. This type of information can be most easily conveyed by graphs and maps with some statistics on trends, variability, and data reliability.

Information about observed climate impacts and vulnerabilities. This includes site-specific and relevant baselines of environmental, social, and economic impacts and vulnerabilities, resulting from observed changes in the climate against which past and current decisions can be monitored, evaluated, and modified over time.

Projections of what climate change may mean for the local area.

This includes, for example, projections based on easily understandable best- and worst-case scenarios with confidence intervals and probability estimates and examples of potential climate impacts. The projections may need to be downscaled from complex global-scale climate models to provide climate information at a geographic scale relevant to decision makers. Then, the information would need to be translated into impacts at the local level, such as how increased streamflow for a particular river may increase flooding.

Information on the economic and health impacts of climate change. Observed and projected local impacts must be translated into costs and benefits, as this information is needed for many decision-making processes.

Entities within the Executive Office of the President, such as the Council on Environmental Quality and the Office of Science and Technology Policy, have led specific government-wide climate information efforts, such as USGCRP’s May 2014 Third National Climate Assessment, which summarizes the impacts of climate change on the United States, now and in the future.

Methods Used to Estimate the Potential Economic Effects of Climate Change in the United States Are Based on Developing Research, Are Complex, Produce Imprecise Results, and Can Convey Useful Insight

Methods used to estimate the potential economic effects of climate change in the United States are based on developing research from a small but growing number of researchers. These methods are complex because they link different types of complicated climate and economic models to assess how projected changes in the climate could affect different sectors and regions. They produce imprecise results because of information and modeling limitations associated with (1) climate modeling uncertainty; (2) limited information on which to base models for specific economic sectors; (3) incomplete coverage of sectors, interactions among sectors, and climate change impacts; and (4) challenges of modeling over long time frames. Nonetheless, according to several experts we interviewed, the methods can convey useful insight into broad themes about potential climate damages across sectors in the United States.

Methods Are Based on Developing Research

Methods used to estimate the potential economic effects of climate change in the United States are based on developing research being undertaken by a small but growing number of researchers, according to the literature we reviewed and several experts we interviewed. Researchers began developing methods to understand the economics of climate change starting in the early 1990s. These original methods— primarily designed to analyze the economic benefits and costs of reducing greenhouse gas emissions—typically assess the economic effects of climate change at a global or multinational scale, with little detailed information about specific regions or sectors within a country. As a result, some experts said that these original methods produce limited information about the economic effects of climate change within different sectors in the United States.

Since the early 2000s, researchers have developed new methods that provide more detailed information about the economic effects of climate change in the United States. Advances in knowledge about the historical relationships between changes in temperature, precipitation, and other climatic variables and the economy; access to data and information about the physical impacts of climate change; and a growth in computing power, among other things, have enabled the development of methods to assess economic effects in specific sectors and regions of the United States, according to literature we reviewed. To date, the new methods have been used primarily to quantify the economic effects of climate change on certain economic sectors, such as agriculture, health, and energy, but the research has been expanding to include additional sectors, such as infrastructure and water resources.

Only recently have studies analyzed the economic effects of climate change using frameworks that can compare effects across different sectors and regions within the United States on a national scale. According to many experts we interviewed, the following are the only two such national-scale research studies:

American Climate Prospectus: This study was published in October 2014 by the Rhodium Group and assessed the economic effects of potential changes in temperature, precipitation, sea level, and extreme weather events on six sectors of the U.S. economy—coastal property, health, agriculture, energy, labor productivity, and crime— within different regions of the country. According to the study, its intent was to provide information on the probability, timing, and scope of a set of economically important climate change impacts comparable across sectors, rather than a conclusive answer about how much climate change will cost the United States. The study’s authors noted that they designed a research framework that could expand and improve as the climate science and economics fields continue to develop.

Climate Change Impacts and Risks Analysis: This is an ongoing research project coordinated by the Environmental Protection Agency (EPA), which published a summary study in 2015. The goal of the study was to assess the extent to which reducing global greenhouse gas emissions may help avoid or reduce climate change impacts and adverse economic effects on six U.S. sectors—health, infrastructure, electricity, water resources, agriculture and forestry, and ecosystems—and enabled the comparison of climate risks across these sectors. According to the authors of the Climate Change Impacts and Risk Analysis study, the study estimated the benefits to the United States of global action on climate change. As such, the analysis presented in the report did not inform on alternative actions and did not constitute a benefit-cost assessment of actions to address climate change. In addition, EPA officials stated that the report was meant to convey broad themes about climate damages across sectors of the United States based on peer-reviewed data and methods. Like the authors of the American Climate Prospectus study, the authors of the Climate Change Impacts and Risk Analysis study noted in the report that the breadth and depth of the project, including the number of sectors covered, will expand in future work as the fields of climate science and economics continue to develop. According to EPA officials, this expanded research will contribute physical and economic information to USGCRP’s next National Climate Assessment.

Methods Are Complex Because They Link Complicated Scientific and Economic Models

Methods used to estimate the potential economic effects of climate change in the United States are complex because, according to literature we reviewed and many experts we interviewed, they use different types of complicated climate and economic models that are linked together in a sequential framework that uses the results of one model as input to another. The different types of climate and economic models include the following:

Climate models: Climate models are mathematical representations of physical, chemical, and biological processes in Earth’s climate system, including the atmosphere, land surface, ocean, and sea ice. These models use scenarios of future greenhouse gas emissions as input, such as a scenario in which current trends in greenhouse gas emissions continue or a scenario in which future emissions are reduced. Based on these scenarios, the models simulate future changes in climate variables, such as changes in temperature and the amount of precipitation. In the United States, global-scale climate models are developed at federally funded institutions, such as the National Center for Atmospheric Research. The American Climate Prospectus and Climate Change Impacts and Risk Analysis studies both used climate models from the National Center for Atmospheric Research, including the Model for the Assessment of Greenhouse- gas Induced Climate Change and the Community Atmosphere Model.

Economic models for individual sectors: These models estimate the direct economic effects in certain sectors from changes in climate variables, such as temperature, and related climate impacts, such as sea level rise. Some economic models for individual sectors are based on relatively new econometric research that uses historically observed relationships between climate variables and economic effects to assess the potential economic effects of climate change on certain segments of the economy. For example, the American Climate Prospectus study used analyses of the historical relationships among temperature and changes in mortality, labor productivity, and violent crime, among other things, to project the economic effects of climate change. Other types of sector-specific models use known or theoretical relationships among climate variables and economic effects to make projections. These types of process-based models include, for example, the Forest and Agricultural Sector Optimization Model, used in the Climate Change Impacts and Risks Analysis study, which estimates changes in market outcomes associated with projected impacts of climate change on U.S. crop and forest yields. The 2015 Climate Change Impacts and Risks Analysis report included 18 process-based models and 2 econometric models, according to EPA officials. Also, a version of the U.S. Energy Information Administration’s National Energy Modeling System, maintained by the Rhodium Group and used in the American Climate Prospectus study, models the impact of changes in temperature on energy demand, power generation, and electricity costs.

Economy-wide models: These models—called Computable General Equilibrium (CGE) models—can help assess how the entire economy, including individual sectors or regions, might react to the impacts of climate change and how their reactions can have implications for other sectors and regions. For example, as a result of changes in climate (e.g., higher temperatures), increases in energy demand and costs can increase the price of a wide range of goods, and decreases in crop yields in Iowa can affect food prices nationwide. As they encompass multiple sectors in a model of the U.S. economy, CGE models can more fully account for interactions between sectors than individual sector models can, potentially affecting findings on the effects of climate change. The American Climate Prospectus used a CGE model to examine how these types of interactions among sectors affect the magnitude and regional variation of effects on the sectors analyzed in the study. According to EPA officials, although the Climate Change Impacts and Risk Analysis study did not use a CGE model to analyze interactions among sectors, some interaction between sectors was analyzed. For example, water supply and availability projections from the water balance model were used to inform irrigation supply in the agricultural sector.

Figure 1 provides an example of how climate models, economic models for specific sectors, and economy-wide models can be linked together sequentially in a framework to estimate the economic effects of climate change.

While the two national-scale studies of the economic effects of climate change across sectors in the United States use sequential modeling frameworks similar to the one shown in figure 1, other methods—referred to by several experts we interviewed as complex integrated assessment models—also incorporate feedback between the different climate and economic modeling components. Such models include the Integrated Global System Model, developed at the Massachusetts Institute of Technology, and the Global Change Assessment Model, developed at the Pacific Northwest National Laboratory. Some experts we interviewed noted that these complex integrated assessment models have traditionally been used to analyze the effects of different policies on the energy sector. The models currently have limited capability to quantify economic effects on individual sectors, according to some experts we interviewed. For example, some experts we interviewed said that the Integrated Global System Model can roughly quantify the economic effects of climate change in the health and agriculture sectors.

Methods, and the National-Scale Studies That Use Them, Produce Imprecise Results Because of Information and Modeling Limitations

According to the literature we reviewed and many experts we interviewed, methods used to estimate the potential economic effects of climate change in the United States, and the national-scale methods that use the methods, produce imprecise estimates of economic effects because of data and modeling limitations associated with (1) climate modeling uncertainty; (2) limited information on which to base models for specific economic sectors; (3) incomplete coverage of sectors, interactions among sectors, and climate change impacts; and (4) challenges of modeling over long time frames.

Climate Modeling Uncertainty

According to a 2012 National Academies report, climate models have advanced over the decades to provide much information that can be used for decision making today, but there are and will continue to be large uncertainties associated with climate modeling. According to literature we reviewed, future greenhouse gas emissions are one key source of uncertainty because they will depend on factors that are extremely challenging to predict decades into the future, such as rates of economic and population growth, technological developments, and policy decisions. Climate models use as input different scenarios that represent a range of potential future greenhouse gas emissions. These scenarios are based on various actions that could be taken to reduce future emissions, such as particular policies initiated by the international community. For example, the Climate Change Impacts and Risk Analysis study used a scenario based on significant global action being taken to reduce future emissions. The study does not specify what significant global action would cost the United States, or what it would entail, and such action may or may not occur. concentration. In its 2013 Fifth Assessment Report, the IPCC estimated that the likely range for climate sensitivity is from 1.5 to 4.5 degrees Celsius. The report also indicated that a “best” estimate could not be determined.

Prospectus study incorporated a range of values for climate sensitivity in its analysis, and the Climate Change Impacts and Risk Analysis study generally used a single value to represent the sensitivity of the climate to rising greenhouse gas concentrations.

Limited Information on Which to Base Sector-Specific Models

The methods rely on limited information that can be used to model the relationships between climate and society, requiring assumptions about how society will respond to future changes in the climate. For example, some sector-specific models assume that historical observed relationships between weather events and economic output variables— such as between temperature and crop production—will represent the effects of long-term climate change. However, over the long time periods under which climate change is expected to occur, individuals, businesses, and government institutions may develop new approaches or technologies to adapt to climate change, lessening its economic effect. For example, one expert said that farmers may respond by making different crop choices. On the other hand, future climate change may have effects that are not revealed in historical events. According to one study, the likelihood that the climate will produce unprecedented effects— for example, heat so extreme that it can induce heat stroke in healthy individuals—will increase as temperatures rise outside the realm of past human experience.

Similarly, data showing how populations will adapt to climate change are limited, so the methods use different assumptions about the extent to which society will adapt to climate change in different sectors. For instance, the Climate Change Impacts and Risk Analysis study assumed that for some sectors, such as agriculture, cost-effective adaptation actions will be taken, such as adjusting the type of crops grown in a region. For the coastal sector, the study considered four adaptation strategies: beach nourishment (adding sand), property elevation, shoreline armoring (using physical structures to protect from erosion), and property abandonment. However, for other sectors, such as the labor sector, the study did not take into account potential adaptation measures—such as using potential technological advances to reduce exposure—that could reduce future economic effects. The American Climate Prospectus study generally assumed that no adaptation would occur in response to climate change. Also, the methods might not incorporate potential market inefficiencies. For example, in the Climate Change Impacts and Risk Analysis, the coastal sector analysis does not consider how subsidized insurance might affect adaptation actions. If insurance prices do not reflect actual risks—such as in the presence of insurance subsidies—insurance availability might disincentivize adaptation actions.

Incomplete Coverage of Sectors, Interactions, and Impacts

The methods have not included all sectors because the U.S. economy is complex and the information available for different sectors and climate impacts varies. Typically, studies using the methods include sectors for which the most information about climate impacts and economic effects is available. For example, both the American Climate Prospectus and Climate Change Impacts and Risk Analysis studies selected sectors based on whether sufficient information and modeling methods were available for the sector and the potential for impacts in the sector to affect the country as a whole, among other things. In addition, the methods do not fully cover some of the sectors that are included. For example, the American Climate Prospectus study’s analysis of the agricultural sector included the impacts of temperature and precipitation changes on the largest commodity crops—maize, wheat, soy, and cotton—but not on fruits, vegetables, nuts, or livestock, which dominate the agricultural sectors in some states.

Furthermore, the methods do not always capture interactions between sectors that may influence economic effects. Such interactions include the ability of capital and labor to move between sectors in the economy, potentially lessening the economic effects of climate change; the impact of changes in water supply on the cost of electric power generation; or the effects of an extreme event cascading throughout a region over time by redistributing the workforce or raising the cost of capital.

Finally, the methods do not include potential impacts that fall outside of the market economy—such as the loss of species from ecosystem disruptions and threats to endangered historical or cultural monuments from rising sea levels or more intense storms—because many of these impacts are difficult to quantify in monetary terms.

Challenges of Modeling over Long Time Frames

Modeling the effects of climate change is challenging because, among other things, it often involves projections over long periods into the future, and these projections become more uncertain over time. For example, the American Climate Prospectus and Climate Change Impacts and Risk Analysis studies both included projections of economic effects though the end of this century, but how the economy will evolve and how society may respond to climate changes over such time frames is inherently uncertain. As a result of this high degree of uncertainty, the methods require that modelers make assumptions about these factors. For example, the American Climate Prospectus study assumed that the structure of the U.S. economy would remain as it is today—an assumption the study notes is almost guaranteed to be wrong—and therefore provided a projection of the effect of potential climate changes through the end of this century on today’s economy, as opposed to projecting these effects on the economy of the future. The Climate Change Impacts and Risk Analysis study made assumptions about future economic growth and labor productivity growth but did not report the sensitivity results associated with this and other key economic assumptions.

Challenges also arise with discounting future benefits and costs, particularly when modeling over long time frames. According to OMB, benefits or costs that occur sooner are generally more valuable than those that occur later. However, according to the literature reviewed and some experts interviewed, the appropriate discount rate to apply when considering benefits and costs across generations, such as those associated with climate change, is subject to much debate. According to one of its authors, this debate was one reason why the American Climate Prospectus study did not present its estimates in discounted terms. For several sectors, the Climate Change Impacts and Risk Analysis study presented some estimates in discounted present value terms consistent with OMB and EPA guidance but presented undiscounted estimates of economic effects for all sectors for 2050 and 2100. Nevertheless, climate change could have both positive and negative potential economic effects at different points in time in the future. Discounting is a way to account for differences in the timing of these effects.

As a result of the challenges of modeling over long time frames, economic analyses may assess the uncertainty in assumptions and data used in making long-term projections. For example, according to one author, the American Climate Prospectus study provided ranges of estimated economic effects for each sector to help account for uncertainty associated with the underlying climate and economic models, such as uncertainty in climate sensitivity. The Climate Change Impacts and Risk Analysis study primarily reported results as point estimates, not providing a range of estimated effects, and reported on only a limited assessment of uncertainty. The authors of the study further acknowledged that exploration of the uncertainties and limitations throughout the study, including the development of ranges for all impact projections, would strengthen the Climate Change Impacts and Risk Analysis study’s results.

Methods Can Convey Useful Insight into Broad Themes about Potential Climate Damages in the United States

Several experts we interviewed noted that even though the methods produce imprecise results, they can convey useful insight into broad themes about potential climate damages across sectors in the United States. For example, according to several experts we interviewed, these methods can provide valuable research information about the potential magnitude of economic effects and potential areas of greatest concern, including where assets may be at greatest risk. Some other experts told us that using the methods can help identify areas where additional research would be most useful. Finally, another expert said that exploring differences among the results from various models and scenarios can help researchers explore and better understand some of the factors that drive the potential economic effects of climate change.

Recent and emerging research could produce additional insight and begin to address some of the limitations of the methods, including those related to incomplete coverage of sectors and climate impacts, according to some experts we interviewed. For example, a new study published in June 2017 by almost all of the same authors of the American Climate Prospectus study and others expands on the research of the American Climate Prospectus study and provides additional insight into the potential economic effects of climate change in particular sectors and regions of the United States by examining county-level effects. In addition, since the 2015 Climate Change Impacts and Risk Analysis summary study was published, EPA has expanded the research project to enhance the analysis of sectors covered in the 2015 report; expand analyses of adaptation for some of these sectors; and include additional sectors such as winter recreation, Alaskan infrastructure, and rail. According to EPA officials involved in the study, they plan to publish a study summarizing these new modeling analyses, estimating impacts across 24 sectors in conjunction with the Fourth National Climate Assessment.

National-Scale Studies and Experts Suggested That Potential Economic Effects of Climate Change in the United States Could Be Significant and Unevenly Distributed

The two national-scale studies—the American Climate Prospectus and the Climate Change Impacts and Risk Analysis—and many of the experts we interviewed suggested that although the methods are developing and produce imprecise results, the potential economic effects of climate change could be significant in many sectors across the U.S. economy and unevenly distributed across U.S. sectors and regions.

National-Scale Studies and Experts Suggested That Potential Economic Effects of Climate Change in the United States Could Be Significant

The national-scale studies and many experts we interviewed suggested that climate change could result in significant economic effects in the United States, and the studies indicated that these effects will likely increase over time for most of the sectors analyzed. As shown in table 1, the American Climate Prospectus study estimated net costs in the near term for most of the five sectors analyzed and net costs by the end of the century for almost all of the six sectors analyzed. For example, the study projected potential economic costs from climate change impacts such as damage to coastal property from storms, decreases in labor supply from higher temperatures, and increases in energy expenditures for air conditioning. The study estimated that the likely combined direct economic effects of the six sectors could reach 0.7 to 2.4 percent of the U.S. gross domestic product per year by the end of this century.

In all sectors analyzed, estimated net economic costs increased over time, becoming greater by late in the century. Specifically, for all sectors that have net economic costs at the lower and upper bounds of the likely ranges of economic effects, the study indicated a projected increase from about two to four times from mid-century to late century. For example, the study estimated that coastal property losses from sea level rise and increases in the frequency and intensity of storms could range from $4 billion to $6 billion per year in the near term (i.e., 2020 through 2039), increasing to a range of $51 billion to $74 billion per year by late century. According to several experts we interviewed, the estimates presented in the study are not precise and may be underestimated because the study did not quantify all known climate impacts.

While the results of the Climate Change Impacts and Risk Analysis study cannot be directly compared with those of the American Climate Prospectus study, the Climate Change Impacts and Risks Analysis study also suggested that climate change could have significant economic effects on several of the economic sectors analyzed, and that those effects would increase by the end of the century. The results of this study, shown in table 2, were primarily presented in terms of the benefits associated with significant global action to reduce greenhouse gas emissions.

According to EPA officials involved in the study, the results highlighted sectors with potentially higher economic effects of climate change. For some sectors, the study estimated the costs of climate changes without any emissions reductions. For example, the study reported $5.0 trillion in economic costs to coastal property from climate change through 2100 (discounted at 3 percent). However, the study did not explain how these estimated costs were obtained, and these estimated costs did not match those reported in the underlying journal papers. EPA officials told us that the scenario that led to this estimate was added as a result of reviewer comments.

National-Scale Studies and Experts Interviewed Suggested That the Potential Economic Effects of Climate Change Could Be Unevenly Distributed across Sectors and Regions

According to the two national-scale studies and several experts we interviewed, potential economic effects could be unevenly distributed across sectors and regions. First, the studies and some experts suggested that climate change will affect certain sectors more than others. The results of the American Climate Prospectus study suggested that nationwide economic effects on sectors, including human health, labor, coastal infrastructure, and energy, could exceed the economic effects on the agriculture and crime sectors. The factors driving the economic effects on the health, labor, coastal infrastructure, and energy sectors included costs associated with, respectively, (1) an increase in premature mortality from higher temperatures, (2) reduced number of hours worked because of high temperatures, (3) infrastructure damage from increased flooding and storm surge, and (4) increased energy demand. In the near term, the annual sector-specific economic effects reported in this study for 2020 through 2039 varied from a range of $8.5 billion in benefits to $9.2 billion in costs for the agriculture sector up to a range of $0.1 billion to $22 billion in costs from changes in labor productivity. In the long term, for 2080 through 2099, the annual sector- specific economic effects reported in this study varied from a range of $12 billion in benefits to $53 billion in costs for the agriculture sector up to a range of $90 billion to $506 billion in mortality costs for the health sector.

The Climate Change Impacts and Risk Analysis study suggested that the benefits from emissions reductions would affect some sectors more than others. For example, among the sectors analyzed, the study reported that emissions reductions would generate relatively larger effects in 2050 for sectors relating to human health, water resources, and electric power. The factors driving the estimated economic effects in this study included lost labor hours and premature mortality from poor air quality and extreme heat in the health sector, costs to water users—such as domestic and industrial water users—when sufficient water is not available, and costs to expand power system capacity in the energy sector.

Another difference in the economic effects across different sectors identified in the studies is that adaptation actions can reduce the negative economic effects of climate change in particular sectors, according to the national-scale studies and several experts we interviewed. For example, the Climate Change Impacts and Risk Analysis study reported that protective adaptation measures—such as beach nourishment, property elevation, shoreline armoring, and property abandonment—can reduce projected coastal property damage in the contiguous United States. In addition, some experts we interviewed said that adaptation actions in coastal areas can be cost effective. However, according to the studies and some experts, information on the cost-effectiveness of adaptation actions in many other sectors remains limited.

With regard to variation across regions, the studies suggested that the economic effects of climate change could be more significant in some geographic areas than others. For example, the American Climate Prospectus study reported that depending on the specific climate impacts evaluated, the combined direct net economic effects for each state could range from annual benefits of 0.8 to 4.5 percent of economic output in Vermont to annual costs of 10.1 to 24 percent of current economic output in Florida by the end of the century. In the Tampa Bay, Florida, area alone, the Climate Change Impacts and Risk Analysis study estimated that damage to coastal property from sea level rise and storm surge could reach $2.8 billion per year by 2100. Figure 2 shows examples of potential economic effects in different U.S. geographic areas.

According to the American Climate Prospectus study, the Southeast, Midwest, and Great Plains regions will likely experience greater combined economic effects than other regions, largely because of coastal property damage in the Southeast and changes in crop yields in the Midwest and Great Plains. The Climate Change Impacts and Risk Analysis study also reported economic effects in particular regions. For instance, according to the study, ocean acidification in the Pacific Northwest is already affecting shellfish harvests, which the study projected could decline by 32 to 48 percent by the end of the century in a scenario without emissions reductions. In addition, under the same scenario, the study estimated that wildfires could burn an additional 1.9 million acres annually in the Rocky Mountains by the end of the century, compared to today, which would significantly increase wildfire response costs. Some experts noted the importance of considering the economic effects of climate change in specific sectors and regions because nationwide estimates can average out some important differences. For example, in the agricultural sector, climate change could cause economic benefits in northern regions of the country from moderate warming, which could offset some agricultural economic losses from more extreme heat in southern regions.

According to Leading Practices and Experts, Information on the Potential Economic Effects of Climate Change Could Help Decision Makers Better Manage Climate Risks

Information on the potential economic effects of climate change could help federal decision makers better manage climate risks, according to leading practices for climate risk management and economic analysis we reviewed and the views of several experts we interviewed. Several experts we interviewed said that existing information on the potential economic effects of climate change could help federal decision makers identify significant climate risks to the federal government. Further, additional economic information could help federal, state, local, and private sector decision makers manage climate risks that drive federal fiscal exposure.

Existing Information on Potential Economic Effects Could Help Identify Significant Climate Risks to the Federal Government

Even though existing information on the potential economic effects of climate change, such as that from the two national-scale studies, is imprecise, it is a first step toward effective climate risk management at the federal level. Several experts we interviewed said federal decision makers could use the insight this information provides about economic damages in various sectors or regions for different scenarios. Along with other available information about current and future climate risks, collectively this information could start informing federal decision makers about climate risks in different sectors and identifying areas of high fiscal exposure. For example, several experts we interviewed said that existing research indicates that infrastructure in coastal areas faces high financial risks relative to the risks posed to many other sectors or geographic regions. In addition, according to some experts we interviewed, projections about adverse economic effects in coastal areas, when considered with other information—for example, disaster costs already incurred such as the approximately $50 billion appropriated for recovery from Hurricane Sandy—could help decision makers better understand the potential magnitude of risks to coastal areas and identify vulnerable coastal infrastructure as a source of potentially high fiscal exposure.

Such a first step in risk assessment is consistent with leading practices for climate risk management and federal standards for internal control. The National Academies’ 2010 leading practices state that managing risk in the context of climate change involves using the best information, including economic information, to assess risks and determine priorities for managing them. Further, in its 2010 report, the National Academies concluded that an iterative process—in which decisions are based on an evolving understanding of the underlying natural and social science—can improve decisions related to climate change risk management because of the opportunities it offers for considering uncertainty. This is consistent with what we reported in December 2016—that the first steps in developing enterprise risk management involve identifying and assessing risks to understand the likelihood of impacts and their associated consequences. As we found in that report, federal managers often handle complex and risky missions, such as preparing for and responding to natural disasters and building and managing safe transportation systems. While it is not possible to eliminate all uncertainties associated with these missions, risk management strategies exist to help federal managers anticipate and manage risks. In addition, under federal standards for internal control, management—in this case, the federal government—should identify, analyze, and respond to risks related to achieving the defined objectives. For example, management estimates the significance of a risk by considering the magnitude of impact, likelihood of occurrence, and nature of the risk—which provides a basis for responding to the risks—and management may need to conduct periodic risk assessments.

Our past work and the work of others have reported that climate change impacts and their economic effects have already cost the federal government money and pose future risks that could lead to increased federal fiscal exposure. As we concluded in our October 2009 report, given the potential magnitude of climate change and the lead time needed to adapt, preparing for these impacts now may reduce the need for far more costly steps in the decades to come. For example, we reported in our February 2013 High-Risk update that federal disaster aid functions as the insurance of last resort in certain circumstances, increasing the federal government’s fiscal exposure to a changing climate. We also reported in December 2014 that from fiscal years 2004 through 2013, the Federal Emergency Management Agency obligated about $95 billion in federal disaster assistance for 650 major disasters declared during this time frame. Then, in July 2015, we reported that the federal government does not adequately plan for disaster resilience and that most federal funding for hazard mitigation is available after a disaster.

Even with the magnitude of these disaster recovery costs, the federal government does not have government-wide strategic planning efforts in place to help set clear priorities for managing significant climate risks before they become federal fiscal exposures. The federal government has not undertaken strategic, government-wide planning to manage climate risks, using the best available information, including information on the potential economic effects of climate change, to identify and assess significant risks. In May 2011, we found that a government-wide strategic planning process could enhance how priorities for an overall federal response to climate change are set and recommended that the Executive Office of the President establish federal strategic climate change priorities. The Executive Office of the President has not implemented this recommendation. Later, in July 2015, we found that the federal government had no comprehensive, strategic approach to identifying, prioritizing and implementing investments for disaster resilience. This report concluded that a strategy to guide federal investments in disaster resilience could result in more effective returns on these investments. Building disaster resilience can include taking actions to adapt to the effects of climate change, as we found in May 2016.

In addition, in our February 2015 High-Risk update, we reported that federal officials do not have a shared understanding of strategic government-wide priorities related to climate change, which along with other issues, limits the federal government’s ability to manage climate risks. In February 2017, we found that federal agencies had undertaken various strategic planning efforts, but it was unclear how they related to each other or whether they amounted to a government-wide approach for reducing federal fiscal exposures. Subsequently, a March 2017 Executive Order rescinded some of these planning efforts and created uncertainty about whether other planning efforts would continue or take their place.

The National Academies’ 2010 leading practices state that climate change risk management efforts need to be focused where immediate attention is needed and that, by prioritizing federal climate risk management activities well, the federal government can help to minimize negative impacts and maximize opportunities associated with climate change. In addition, most experts we interviewed told us that federal decision makers should prioritize risk management efforts on significant climate risks that create the greatest fiscal exposure. By using information on the potential economic effects of climate change to assess and identify significant climate risks and craft appropriate federal responses, the federal government could take an initial step in establishing government- wide priorities to manage significant climate risks, which we recommended in May 2011 to reduce federal fiscal exposure and continue to believe is important. This initial step could include establishing a strategy to identify, prioritize, and guide federal investments to enhance resilience against future disasters, as we recommended in July 2015.

To achieve the ultimate objective of establishing government-wide priorities, decision makers need information on policy alternatives that are representative of all available alternatives and their economic effects, such as benefits and costs. The authors of the American Climate Prospectus study highlighted, for instance, that national decision makers must weigh the potential economic and social impacts of climate change against the costs of policies to reduce emissions or make our economy more resilient. Further, EPA officials stated that using information from national-scale economics reports to make policy choices would involve a number of intermediate analytical steps, including (1) estimating the federal risk exposure from the national or regional estimates, (2) identifying policy options, and (3) analyzing the costs and benefits of those options. The relevant point for decision makers, according to these EPA officials, is that multisector, national estimates of climate damages can be made available for use, though additional analysis may be needed for specific policy actions.

Additional Information on Potential Economic Effects Could Help Decision Makers’ Efforts to Manage Climate Risks

A strategy to identify, prioritize, and guide federal investments to enhance resilience against future disasters could include additional information on the economic effects of climate change. Such economic information could help inform future efforts by federal, state, local, and private sector decision makers to manage climate risks, according to a 2010 National Academies report, our prior work, literature we reviewed, and several experts we interviewed. The 2010 National Academies report, literature we reviewed, and several experts we interviewed noted that to make informed adaptation choices, decision makers need more comprehensive information on economic effects to better understand the potential costs of climate change to society and begin to develop an understanding of the benefits and costs of different adaptation options. In addition, economic guidance generally states that investment decisions—which would include decisions about adaptation investments—should be informed by a consideration of both benefits and costs of relevant alternatives. For example, OMB has issued guidance on using benefit-cost analyses to help federal agencies efficiently allocate resources through well-informed decision making. This guidance includes OMB Circular A-94, which directs agencies to follow certain economic guidelines for benefit-cost and cost-effectiveness analyses of federal programs or policies to promote efficient resource allocation through well-informed decision making in certain circumstances.

The American Climate Prospectus study also recognized the importance of balancing benefits and costs, stating that national policy makers must weigh the potential economic and social impacts of climate change against the cost of the policies to manage climate risks. When it comes to managing climate risks through adaptation, the literature we reviewed and several experts we interviewed noted that a full understanding of the adaptation alternatives would require information on the economic effects of climate change impacts, how adaptation may lessen some of these effects, and the costs of adaptation.

In our 2013 High-Risk update, we reported that the federal government has a role to play in providing information to decision makers so they can make better choices about adapting to climate change since their decisions can drive federal fiscal exposure. Moreover, we found in our 2015 High-Risk update that state, local, and private sector decision makers drive federal climate-related fiscal exposures because they are responsible for planning, constructing, and maintaining certain types of vulnerable infrastructure paid for with federal funds, insured by federal programs, or eligible for federal disaster assistance. Therefore, federal efforts to provide information to these decision makers could help them make more informed choices about how to manage climate risks, ultimately helping to reduce federal fiscal exposure. In our November 2016 report, we reported that these decision makers need climate information—including economic information—that represents the best available information and is updated over time.

Some experts we interviewed noted that emerging research—which includes updates to the national-scale studies of the economic effects of climate change—will help fill information gaps. Recognizing that decision makers need more comprehensive economic information to manage climate risks, the National Academies recommended in 2016 that USGCRP integrate social, behavioral, and economic science into the National Climate Assessment to support decision-making processes. EPA officials told us that, as a step toward this integration, the agency’s updates to the Climate Change Impacts and Risk Analysis project advance the understanding of economic effects of climate change. The officials said that this information is documented in new analyses serving as input to the next National Climate Assessment. While several experts we interviewed noted that information on the economic effects of climate change is currently relatively sparse, they also said that new information is still emerging.

Conclusions

Climate change impacts are already costing the federal government money, and these costs will likely increase over time as the climate continues to change. Even though existing information on the potential economic effects of climate change, such as that from the two national- scale studies, is imprecise, it could help identify significant potential damages for federal decision makers—an initial step in the process for managing climate risks. Under the National Academies’ 2010 leading practices, climate change risk management efforts need to be focused on where immediate attention is needed, and by prioritizing federal climate risk management activities well, the federal government can help to minimize negative impacts and maximize opportunities associated with climate change. The 2010 National Academies report, literature we reviewed, and several experts we interviewed noted that to make informed adaptation choices, decision makers need more comprehensive information on economic effects to better understand the potential costs of climate change to society and begin to develop an understanding of the benefits and costs of different adaptation options. By using information on the potential economic effects of climate change to help identify significant climate risks and craft appropriate federal responses—such as establishing a strategy to guide federal investment to enhance resilience against future disasters—the federal government could take an initial step in establishing government-wide priorities to manage significant climate risks. To help prioritize and guide federal investments, such a strategy could include developing more comprehensive information on the potential benefits and costs of different adaptation options.

Recommendation for Executive Action

We are making the following recommendation to the Executive Office of the President: The appropriate entities within the Executive Office of the President, including the Council on Environmental Quality, Office and Management and Budget, and Office of Science and Technology Policy, should use information on the potential economic effects of climate change to help identify significant climate risks facing the federal government and craft appropriate federal responses. Such responses could include establishing a strategy to identify, prioritize, and guide federal investments to enhance resilience against future disasters. (Recommendation 1)

Agency Comments

We provided a draft of this report for review and comment to the Council on Environmental Quality, the Office of Science and Technology Policy, and EPA. The Council on Environmental Quality and the Office of Science and Technology Policy did not provide comments. EPA did not provide written comments on our findings and recommendation but instead provided technical comments, which we incorporated as appropriate.

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If you or your staff have any questions about this report, please contact J. Alfredo Gómez at (202) 512-3841 or gomezj@gao.gov or Oliver Richard at (202) 512-2700 or richardo@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Objectives, Scope, and Methodology

In this report, we examine (1) what is known about methods used to estimate the potential economic effects of climate change in the United States; (2) what is known about the potential economic effects of climate change in the United States; and (3) to what extent have leading practices and experts found that information about the potential economic effects of climate change could inform efforts to manage climate risks across the federal government.

To address our audit objectives, we conducted a literature search for studies that (1) described the methods used to develop estimates of the economic effects of climate change in the United States and (2) produced estimates of such effects at a national scale, across different sectors and regions. We targeted the literature search to studies that were published in 2005 or later to encompass the 10 years of research preceding the start of our work. We identified relevant studies though three efforts: (1) searching literature databases, including Scopus, Web of Science, EBSCO, ProQuest, PolicyFile, and OCLC databases; (2) referrals from experts we interviewed during semistructured interviews (a discussion of these interviews is included below); and (3) reviewing citations in literature we reviewed. In total, we identified 30 studies that were relevant to our objectives and scope. We reviewed these studies to identify common themes related to the types of methods used to estimate the economic effects of climate change in the United States, the limitations of these methods, and what is known about the economic effects of climate change in the United States.

Of the 30 studies identified that described methods to estimate economic effects, 2 included estimates of the potential economic effects of climate change in the United States on a national-scale, across different sectors and regions—the American Climate Prospectus study by the Rhodium Group and the Climate Change Impacts and Risk Analysis study by the Environmental Protection Agency. Many experts we interviewed confirmed that these two studies represented the best available estimates to date. To review the two national-scale studies, we used standard economic principles, similar to those embodied in federal and agency guidance, including a review of the statement of objective and scope, methodology, analysis of effects, sensitivity analysis, and documentation.

Through this assessment, we identified several limitations that affect the precision of the studies’ results and are common to the methods used to estimate the economic effects of climate change that were identified in literature we reviewed and by experts we interviewed. We discuss these limitations in the report. Finally, we interviewed the authors of these studies to discuss the studies’ methodologies and limitations.

In addition, to address our audit objectives we conducted 26 semistructured interviews with economists and other experts we identified through snowball sampling based on expert referrals. Specifically, we interviewed experts who (1) were recommended by at least one other expert, (2) authored at least one study identified through our literature review, (3) were available and agreed to meet with us, and (4) had a range of views and expertise needed to address our objectives. For example, we interviewed experts who were knowledgeable enough about methods to estimate the economic effects of climate change impacts that they could discuss strengths and limitations of these methods. Repeated recommendations of the same experts indicated that we reached saturation of the field and were identifying the appropriate experts. We reviewed experts’ curricula vitae—to the extent they were available—to ensure that their areas of expertise and research were relevant to the engagement’s objectives and that we were gathering the range of expertise that we needed, including expertise on the strengths and limitations of the methods discussed in this report. During these interviews, we asked experts about (1) methods used to develop estimates of the economic effects of climate change impacts in the United States; (2) strengths and limitations these methods may have; (3) what is known about the economic effects of climate change in the United States; (4) potential federal fiscal exposures that could result from these effects; and (5) how, if at all, information about potential economic effects of climate change could inform climate risk management across the federal government. We interviewed 23 out of the 26 experts in person in select geographic areas: Berkeley, California; Stanford, California; Boulder, Colorado; Boston, Massachusetts; Cambridge, Massachusetts; and Washington, D.C. Because this is a nonprobability sample, our findings cannot be generalized to other experts we did not interview. Rather, these interviews provided us with illustrative examples of methods used to estimate economic effects of climate change, what is known about economic effects of climate change in the United States, and ways information about the potential economic effects of climate change could inform efforts to manage climate risks across the federal government. In addition, the specific areas of expertise varied among the experts we interviewed, so not all of the experts commented on all of the interview questions we asked.

Finally, to address our third audit objective, we reviewed leading practices and principles of risk management to identify key elements. We reviewed these practices and principles to identify how, if at all, economic information could be considered in risk management frameworks. National Academies’ leading practices on climate risk management characterize climate change adaptation as a risk management strategy, so we then identified how information about the economic costs and benefits of climate change could be considered to manage climate risks. We also reviewed our reports related to risk management and climate change to determine what federal actions could reduce fiscal exposure because of climate risks. We then determined how, if at all, what is known about economic effects of climate change could help implement or enhance these actions.

We conducted this performance audit from December 2015 to September 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the individual contacts named above, Joseph Dean Thompson (Assistant Director), Colleen Candrl, Lilia Chaidez, Ellen Fried, Cindy Gilbert, Tim Guinane, Anne Hobson, Jeanette Soares, Sara Sullivan, Kiki Theodoropoulos, and Michelle R. Wong made key contributions to this report.