Burnout
Mortgage Finance in the Face of Rising Climate Risk
Amine Ouazad & Matthew Kahn
NBER Working Paper, September 2019
Abstract:
Recent evidence suggests an increasing risk of natural disasters of the magnitude of hurricane Katrina and Sandy. Concurrently, the number and volume of flood insurance policies has been declining since 2008. Hence, households who have purchased a house in coastal areas may be at increasing risk of defaulting on their mortgage. Commercial banks have the ability to screen and price mortgages for flood risk. Banks also retain the option to securitize some of these loans. In particular, bank lenders may have an incentive to sell their worse flood risk to the two main agency securitizers, the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac. In contrast with commercial banks, Fannie and Freddie follow observable rules set by the FHFA for the purchase and the pricing of securitized mortgages. This paper uses the impact of one such sharp rule, the conforming loan limit, on securitization volumes. We estimate whether lenders’ sales of mortgages with loan amounts right below the conforming loan limit increase significantly after a natural disaster that caused more than a billion dollar in damages. Results suggest a substantial increase in securitization activity in years following such a billion-dollar disaster. Such increase is larger in neighborhoods for which such a disaster is “new news”, i.e. does not have a long history of hurricanes. Conforming loans are riskier in dimensions not observed in publicly available data sets: the borrowers have lower credit scores and they are more likely to become delinquent or default. A structurally estimated model of mortgage pricing with asymmetric information suggests that bunching at the conforming loan limit is an increasing function of perceived price volatility and declining price trends. A simulation of the impact of increasing climate risk on mortgage origination volumes with and without the GSEs suggests that the GSEs may act as an implicit insurer, i.e. a substitute for the declining National Flood Insurance Program.
Evidence for sharp increase in the economic damages of extreme natural disasters
Matteo Coronese et al.
Proceedings of the National Academy of Sciences, 22 October 2019, Pages 21450-21455
Abstract:
Climate change has increased the frequency and intensity of natural disasters. Does this translate into increased economic damages? To date, empirical assessments of damage trends have been inconclusive. Our study demonstrates a temporal increase in extreme damages, after controlling for a number of factors. We analyze event-level data using quantile regressions to capture patterns in the damage distribution (not just its mean) and find strong evidence of progressive rightward skewing and tail-fattening over time. While the effect of time on averages is hard to detect, effects on extreme damages are large, statistically significant, and growing with increasing percentiles. Our results are consistent with an upwardly curved, convex damage function, which is commonly assumed in climate-economics models. They are also robust to different specifications of control variables and time range considered and indicate that the risk of extreme damages has increased more in temperate areas than in tropical ones. We use simulations to show that underreporting bias in the data does not weaken our inferences; in fact, it may make them overly conservative.
Climate experts’ views on geoengineering depend on their beliefs about climate change impacts
Astrid Dannenberg & Sonja Zitzelsberger
Nature Climate Change, October 2019, Pages 769–775
Abstract:
Damages due to climate change are expected to increase with global warming, which could be limited directly by solar geoengineering. Here we analyse the views of 723 negotiators and scientists who are involved in international climate policy-making and who will have a considerable influence on whether solar geoengineering will be used to counter climate change. We find that respondents who expect severe global climate change damages and who have little confidence in current mitigation efforts are more opposed to geoengineering than respondents who are less pessimistic about global damages and mitigation efforts. However, we also find that respondents are more supportive of geoengineering when they expect severe climate change damages in their home country than when they have more optimistic expectations for the home country. Thus, when respondents are more personally affected, their views are closer to what rational cost–benefit analyses predict.
More hots: Quantifying upward trends in the number of extremely hot days and nights in Tallahassee, Florida, USA: 1892–2018
James Elsner & Svetoslava Elsner
International Journal of Climatology, forthcoming
Abstract:
Hot day and night occurrences in Tallahassee, Florida, USA are analysed and modelled. A hot day is defined as one during which the high temperature exceeds 100°F (37.8°C). A hot night is defined as one during which the low temperature fails to drop below 77°F (25°C). The U.S. National Weather Service Office (WSO) Tallahassee official record shows an upward trend in the number of hot days at a rate of 2.1% (±.96% margin of error [moe]) per year and a more pronounced upward trend in the number of hot nights at a rate of 4.5% (±.71% moe) per year. Increasingly frequent hot days and nights result from more and longer hot events (consecutive hot days/nights). Upward trends estimated from a 127‐year time series of annual hot day/night counts, with the years prior to 1940 adjusted for location, are consistent with upward trends estimated over the shorter, more recent, period. With projected continued warming we expect more hot days and nights making uncomfortable and unhealthy conditions more common in the city.
Exposure to excessive heat and impacts on labour productivity linked to cumulative CO2 emissions
Yann Chavaillaz et al.
Scientific Reports, September 2019
Abstract:
Cumulative CO2 emissions are a robust predictor of mean temperature increase. However, many societal impacts are driven by exposure to extreme weather conditions. Here, we show that cumulative emissions can be robustly linked to regional changes of a heat exposure indicator, as well as the resulting socioeconomic impacts associated with labour productivity loss in vulnerable economic sectors. We estimate historical and future increases in heat exposure using simulations from eight Earth System Models. Both the global intensity and spatial pattern of heat exposure evolve linearly with cumulative emissions across scenarios (1% CO2, RCP4.5 and RCP8.5). The pattern of heat exposure at a given level of global temperature increase is strongly affected by non-CO2 forcing. Global non-CO2 greenhouse gas emissions amplify heat exposure, while high local emissions of aerosols could moderate exposure. Considering CO2 forcing only, we commit ourselves to an additional annual loss of labour productivity of about 2% of total GDP per unit of trillion tonne of carbon emitted. This loss doubles when adding non-CO2 forcing of the RCP8.5 scenario. This represents an additional economic loss of about 4,400 G$ every year (i.e. 0.59 $/tCO2), varying across countries with generally higher impact in lower-income countries.
Temperature and production efficiency growth: Empirical evidence
Surender Kumar & Madhu Khanna
Climatic Change, September 2019, Pages 209–229
Abstract:
This paper examines the marginal effects of temperature on the growth rate and variability in growth rate of total factor productivity (TFP) of a country, as measured by its production efficiency relative to a stochastic frontier. Using panel data for 168 countries for the period 1950–2014 to estimate a one-step stochastic frontier function, we find that temperature has a concave relationship with the growth rate of production efficiency and with the variability in this growth rate. We observe that hotter than the average temperature is not only detrimental to production efficiency growth but also makes the growth less stable than otherwise, and these effects are larger in very hot countries with average annual temperature greater than 25 °C. More importantly, we observe that the detrimental marginal effects of higher temperature depend on the level of economic development of a country; they are larger for poor countries relative to rich countries. Our findings have implications for the specification of climate damage functions in integrated assessment models and estimates of country-specific social cost of carbon.
Profiting in a Warming World: Investigating the Link Between Greenhouse Gas Emissions and Capitalist Profitability in OECD States
Matthew Soener
Sociological Forum, forthcoming
Abstract:
Economic growth is a key contributor to climate change, but undergirding growth is capitalist profitability. In this article, I refine this long‐standing relationship between growth and emissions by estimating if the profit rate and the “exploitation rate” (surplus profits / wages and salaries) predict greenhouse gas emissions. I do so in a sample of advanced capitalist economies from 1995 to 2016 with profitability data on four industries (agriculture, manufacturing/construction, energy, and transportation) as well as greenhouse gas emissions data for both those industries and emissions at the national level. Methodologically, I use two‐way fixed effects models and panel‐corrected standard errors. My results show that the total profit and exploitation rates are positively associated with emissions. Exploitation in the transportation and manufacturing/construction sectors, moreover, is also positively associated with emissions. This article provides empirical support for those in environmental sociology claiming that capitalist profitability is a key driver of climate change and ecological change is inseparable from unequal social relations.
Declining CO2 price paths
Kent Daniel, Robert Litterman & Gernot Wagner
Proceedings of the National Academy of Sciences, 15 October 2019, Pages 20886-20891
Abstract:
Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate–economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide (CO2) price path based on probabilistic assumptions around climate damages. Atmospheric CO2 is the “asset” with a negative expected return. The economic model focuses on society’s willingness to substitute consumption across time and across uncertain states of nature, enabled by an Epstein–Zin (EZ) specification that delinks preferences over risk from intertemporal substitution. In contrast to most modeled CO2 price paths, EZ-Climate suggests a high price today that is expected to decline over time as the “insurance” value of mitigation declines and technological change makes emissions cuts cheaper. Second, higher risk aversion increases both the CO2 price and the risk premium relative to expected damages. Lastly, our model suggests large costs associated with delays in pricing CO2 emissions. In our base case, delaying implementation by 1 y leads to annual consumption losses of over 2%, a cost that roughly increases with the square of time per additional year of delay. The model also makes clear how sensitive results are to key inputs.
Impact of climate change on the integrity of the superstructure of deteriorated U.S. bridges
Susan Palu & Hussam Mahmoud
PLoS ONE, October 2019
Abstract:
Bridges in America are aging and deteriorating, causing substantial financial strain on federal resources and tax payers’ money. Of the various deterioration issues in bridges, one of the most common and costly is malfunctioning of expansion joints, connecting two bridge spans, due to accumulation of debris and dirt in the joint. Although expansion joints are small components of bridges’ superstructure, their malfunction can result in major structural problems and when coupled with thermal stresses, the demand on the structural elements could be further amplified. Intuitively, these additional demands are expected to even worsen if one considers potential future temperature rise due to climate change. Indeed, it has been speculated that climate change is likely to have negative effect on bridges worldwide. However, to date there has been no serious attempts to quantify this effect on a larger spatial scale with no studies pertaining to the integrity of the main load carrying girders. In this study, we attempt to quantify the effect of clogged joints and climate change on failure of the superstructure of a class of steel bridges around the U.S. We surprisingly find that potentially most of the main load carrying girders, in the analyzed bridges, could reach their ultimate capacity when subjected to service load and future climate changes. We further discover that out of nine U.S. regions, the most vulnerable bridges, in a descending order, are those located in the Northern Rockies & Plains, Northwest and Upper Midwest. Ultimately, this study proposes an approach to establish a priority order of bridge maintenance and repair to manage limited funding among a vast inventory in an era of climate change.
The Health and Climate Impacts of Carbon Capture and Direct Air Capture
Mark Jacobson
Energy & Environmental Science, forthcoming
Abstract:
Data from a coal with carbon capture and use (CCU) plant and a synthetic direct air carbon capture and use (SDACCU) plant are analyzed for the equipment’s ability, alone, to reduce CO2. In both plants, natural gas turbines power the equipment. A net of only 10.8% of the CCU plant’s CO2-equivalent (CO2e) emissions and 10.5% of the CO2 removed from the air by the SDACCU plant are captured over 20 years, and only 20-31%, are captured over 100 years. The low net capture rates are due to uncaptured combustion emissions from natural gas used to power the equipment, uncaptured upstream emissions, and, in the case of CCU, uncaptured coal combustion emissions. Moreover, the CCU and SDACCU plants both increase air pollution and total social costs relative to no capture. Using wind to power the equipment reduces CO2e relative to using natural gas but still allows air pollution emissions to continue and increases the total social cost relative to no carbon capture. Conversely, using wind to displace coal without capturing carbon reduces CO2e, air pollution, and total social cost substantially. In sum, CCU and SDACCU increase or hold constant air pollution health damage and reduce little carbon before even considering sequestration or use leakages of carbon back to the air. Spending on capture rather than wind replacing either fossil fuels or bioenergy always increases total social cost substantially. No improvement in CCU or SDACCU equipment can change this conclusion while fossil power plant emissions exist, since carbon capture always incurs an equipment cost never incurred by wind, and carbon capture never reduces, instead mostly increases, air pollution and fuel mining, which wind eliminates. Once fossil power plant emissions end, CCU (for industry) and SDACCU social costs need to be evaluated against the social costs of natural reforestation and reducing nonenergy halogen, nitrous oxide, methane, and biomass burning emissions.
The Effects of Weather on Recreational Fishing Demand and Adaptation: Implications for a Changing Climate
Steven Dundas & Roger von Haefen
Journal of the Association of Environmental and Resource Economists, forthcoming
Abstract:
Outdoor recreation is one of the most popular leisure time activities in the United States, yet the potential impacts of climate change on the non-market aspects of this activity are largely unknown or poorly understood. We estimate the non-linear effect of temperature and precipitation on the demand for a significant segment of the outdoor recreation economy – shoreline marine recreational fishing in the Atlantic and Gulf Coast regions – from 2004-2009. Our econometric estimates suggest extreme heat significantly reduces recreation participation. We find declines in participation (up to 15 percent) and welfare (up to $312 million annually) over a range of predicted climate futures. These estimates vary spatially and temporally, with warmer locations and times of year experiencing significant losses and gains possible in cooler areas. We also find evidence of climate-averting behavior as anglers shift their activities to nighttime rather than fish less frequently to mitigate the negative impacts from extreme heat.
Conservation Spillovers: The Effect of Rooftop Solar on Climate Change Beliefs
Graham Beattie, Yi Han & Andrea La Nauze
Environmental and Resource Economics, November 2019, Pages 1425–1451
Abstract:
Biased beliefs about climate change may lead to under-regulation of emissions. We study a new channel by which the public form beliefs about climate change: visible mitigation actions. By exploiting the rapid growth of rooftop solar panels, a large survey, and differences in incentives to install solar, we find that visible mitigation actions have a positive impact on belief in basic climate science. However, we also find that higher solar penetration reduces concern about the impacts of climate change, which may dampen demand for additional mitigation policy and individual abatement effort. Our results suggest that government policies that incentivize technology adoption can have subtle but important spillover effects on beliefs and other behaviors.
Mercury reallocation in thawing subarctic peatlands
M.F. Fahnestock et al.
Geochemical Perspectives Letters, October 2019
Abstract:
Warming Arctic temperatures have led to permafrost thaw that threatens to release previously sequestered mercury (Hg) back into the environment. Mobilisation of Hg in permafrost waters is of concern, as Hg methylation produced under water-saturated conditions results in the neurotoxin, methyl Hg (MeHg). Thawing permafrost may enhance Hg export, but the magnitude and mechanisms of this mobilisation within Arctic ecosystems remain poorly understood. Such uncertainty limits prognostic modelling of Hg mobilisation and impedes a comprehensive assessment of its threat to Arctic ecosystems and peoples. Here, we address this knowledge gap through an assessment of Hg dynamics across a well-studied permafrost thaw sequence at the peak of the growing season in biologically active peat overlying permafrost, quantifying total gaseous mercury (TGM) fluxes, total mercury (HgTot) in the active layer peat, porewater MeHg concentrations, and identifying microbes with the potential to methylate Hg. During the initial thaw, TGM is liberated, likely by photoreduction from permafrost where it was previously stored for decades to centuries. As thawing proceeds, TGM is largely driven by hydrologic changes as evidenced by Hg accumulation in water-logged, organic-rich peat sediments in fen sites. MeHg in porewaters increase across the thaw gradient, a pattern coincident with increases in the relative abundance of microbes possibly containing genes allowing for methylation of ionic Hg. Findings suggest that under changing climate, frozen, well-drained habitats will thaw and collapse into saturated landscapes, increasing the production of MeHg and providing a significant source of the toxic, bioaccumulative contaminant.