Sunk Costs

Kevin Lewis

October 14, 2020

Neglected No More: Housing Markets, Mortgage Lending, and Sea Level Rise
Benjamin Keys & Philip Mulder
NBER Working Paper, October 2020


In this paper, we explore dynamic changes in the capitalization of sea level rise (SLR) risk in housing and mortgage markets. Our results suggest a disconnect in coastal Florida real estate: From 2013-2018, home sales volumes in the most-SLR-exposed communities declined 16-20% relative to less-SLR-exposed areas, even as their sale prices grew in lockstep. Between 2018-2020, however, relative prices in these at-risk markets finally declined by roughly 5% from their peak. Lender behavior cannot reconcile these patterns, as we show that both all-cash and mortgage-financed purchases have similarly contracted, with little evidence of increases in loan denial or securitization. We propose a demand-side explanation for our findings where prospective buyers have become more pessimistic about climate change risk than prospective sellers. The lead-lag relationship between transaction volumes and prices in SLR-exposed markets is consistent with dynamics at the peak of prior real estate bubbles.

Fall in the sea, eventually? A green paradox in climate adaptation for coastal housing markets
Lee Parton & Steven Dundas
Journal of Environmental Economics and Management, forthcoming


Efficient adaptation to climate change in coastal areas is likely to require public policy interventions. New policies or expectations of policy changes that impact private assets, such as housing, may generate economic incentives that result in unintended consequences. We examine the effect on new housing development resulting from a scientific report by a regulatory agency mandating coastal communities in North Carolina (NC) consider sea-level rise when developing new land-use policies. Estimates from our preferred triple-differences model suggest the policy announcement increased building permits by 32% in coastal NC counties until permitting returned to pre-policy levels after a moratorium on new regulations was passed by the state legislature. Our results are supported by numerous robustness checks, including alternative controls, placebo tests and a parcel-level model in Dare County, NC. This green paradox in coastal climate adaptation implies that hundreds of millions of dollars in additional unregulated housing was constructed in NC locations vulnerable to sea-level rise likely due to perverse incentives generated by a policy signal.

Local Warming Increases Climate Policy Support: Analysis of Behavioral Intentions, Internet Searches, and US Congressional Vote Shares
Matthew Sisco & Elke Weber
Columbia University Working Paper, July 2020


We report on four studies that examine the effects of abnormal temperature experiences on climate policy support. Study 1 shows perceived weather abnormality to be correlated with self-reported climate policy support, an effect that is robust across USA, Italy, and China but strongest in the USA. Study 2 identifies a significant effect of objective temperature abnormality on climate policy support in a large US sample. Study 3 analyzes the impacts of objective temperature abnormality on information acquisition behavior, namely Google searches about climate change and climate policies, finding strong evidence that weather abnormalities increase such searches. Lastly, Study 4 analyzes a high-effort and highly consequential behavioral outcome, voting for candidates who support climate policies, showing that experienced temperature abnormalities significantly decreased Republican candidates’ vote shares in the 2018 US midterm elections.

Climate Risk and Beliefs in New York Floodplains
Matthew Gibson & Jamie Mullins
Journal of the Association of Environmental and Resource Economists, November 2020, Pages 1069–1111


Applying a difference-in-differences framework to a census of residential property transactions in New York City 2003–17, we estimate the price effects of three flood risk signals: (1) the Biggert-Waters Flood Insurance Reform Act, which increased premiums; (2) Hurricane Sandy; and (3) new floodplain maps reflecting three decades of climate change. Estimates are negative for all three signals, and some are large: properties included in the new floodplain after escaping flooding by Sandy experienced 11% price reductions. We investigate possible mechanisms, including selection of properties into the market and residential sorting. Finding no evidence for these, we develop a parsimonious theoretical model that allows decomposition of our reduced-form estimates into the effects of insurance premium changes and belief updating. Results suggest the new maps induced belief changes comparable to those from insurance reform.

Incentivizing Negative Emissions Through Carbon Shares
Derek Lemoine
NBER Working Paper, October 2020


I show that commonly proposed emission taxes are not optimal for controlling climate change: they can achieve zero emissions but cannot induce negative emissions. The first-best policy charges firms period by period for leaving a stock of carbon in the atmosphere, not just for injecting carbon into the atmosphere. I develop a feasible version of this policy that requires emitters to post an upfront bond that finances a transferable asset (a “carbon share”). The regulator reduces this asset's face value as damages accumulate and pays out the asset's remaining face value once its holder removes the underlying unit of carbon from the atmosphere. I show that the optimal bond is equal to the maximum possible marginal damage from climate change, with the carbon share paying a dividend as long as the worst-case is not realized. Quantitatively, a bond that is double the optimal emission tax is sufficient to provide optimal carbon removal incentives in 95% of cases.

Climate effects of China's efforts to improve its air quality
Yixuan Zheng et al.
Environmental Research Letters, September 2020


Facing severe air pollution issues, China has implemented a series of clean air policies aimed to improve the country's air quality. These policies largely focused on reducing emissions of major air pollutants such as sulfur dioxide (SO2) and primary aerosols. However, changes in such pollution also affect radiative forcing. To understand the climate consequences of these clean air actions in China, we evaluate the near-equilibrium climate response to sustained changes in aerosol (and precursors) emission rates equivalent to those that occurred in China between 2006 and 2017. During this period, China's SO2 emissions declined by ~70%, and black carbon emissions declined by ~30%. Climate simulations that used a fully coupled ocean and atmosphere climate model indicate that China's reductions in aerosol emission rates from 2006 to 2017 may exert a net increase in global radiative forcing of 0.09 ± 0.03 W m−2 and a mean warming of 0.12 ± 0.01 °C in the Northern Hemisphere; and may also affect the precipitation rates in East Asia and in more distant regions. The success of Chinese policies to further reduce aerosol emissions may bring additional net warming, and this 'unmasked' warming would in turn compound the challenge and urgency of international climate mitigation efforts.

Increasing threat of coastal groundwater hazards from sea-level rise in California
Kevin Befus et al.
Nature Climate Change, October 2020, Pages 946–952


Projected sea-level rise will raise coastal water tables, resulting in groundwater hazards that threaten shallow infrastructure and coastal ecosystem resilience. Here we model a range of sea-level rise scenarios to assess the responses of water tables across the diverse topography and climates of the California coast. With 1 m of sea-level rise, areas flooded from below are predicted to expand ~50–130 m inland, and low-lying coastal communities such as those around San Francisco Bay are most at risk. Coastal topography is a controlling factor; long-term rising water tables will intercept low-elevation drainage features, allowing for groundwater discharge that damps the extent of shoaling in ~70% (68.9–82.2%) of California’s coastal water tables. Ignoring these topography-limited responses increases flooded-area forecasts by ~20% and substantially underestimates saltwater intrusion. All scenarios estimate that areas with shallow coastal water tables will shrink as they are inundated by overland flooding or are topographically limited from rising inland.

Interacting Infrastructure Disruptions Due to Environmental Events and Long‐Term Climate Change
Michelle Hummel et al.
Earth's Future, September 2020


Climate change places additional stress on critical infrastructure systems as demand for resources (e.g., water, electricity) increases and environmental disruptions (e.g., flooding, wildfires) become more frequent and severe. Interconnected infrastructure systems may be particularly vulnerable, as disruptions in one system can cascade to other systems and increase the severity of impacts. To ensure continued functionality, infrastructure systems must be designed or adapted to account for changing environmental conditions, with consideration for the interactions between systems. For this study, we examine the dependencies between shoreline protective infrastructure and transportation infrastructure in the context of sea‐level rise in the San Francisco Bay Area. Shoreline modifications implemented in one location can cause hydrodynamic feedbacks that exacerbate flooding and associated disruptions elsewhere. On the other hand, the decision not to implement shoreline protection can cause local flooding of roadways that leads to traffic feedbacks and system‐wide travel delays. We compare the magnitude of these feedbacks, in terms of vehicle hours traveled (VHT), across a range of county‐level shoreline scenarios to characterize the effects of one county’s shoreline adaptation decisions on its neighbors. Our results show that VHT increases by as much as 7.2% due to hydrodynamic feedbacks and 10.7% due to traffic feedbacks. Comparing these effects for each scenario allows for targeted decision‐making about adaptation approaches that account for both the local effects of flood disruptions and the regional network effects driven by infrastructure interactions.

Oil at risk: Political violence and accelerated carbon extraction in the Middle East and North Africa
Ryan Merrill & Anthony Orlando
Energy Economics, forthcoming


What effect does the threat of expropriation have on resource extraction? Much of the economic literature suggests that uncertainty reduces investment, but the theory of risk-induced extraction suggests the opposite. In this paper, we test this theory in the context of political violence, which poses a real threat of state destabilization and violent expropriation of property rights. Facing this uncertainty, we find that oil producers in the Middle East and North Africa increase oil production in response to political violence. This finding has important negative consequences for the world in terms of climate change and demonstrates a previously untested mechanism through which exhaustible resource supply is flooding the market.

The hysteresis of the Antarctic Ice Sheet
Julius Garbe et al.
Nature, 24 September 2020, Pages 538–544


More than half of Earth’s freshwater resources are held by the Antarctic Ice Sheet, which thus represents by far the largest potential source for global sea-level rise under future warming conditions. Its long-term stability determines the fate of our coastal cities and cultural heritage. Feedbacks between ice, atmosphere, ocean, and the solid Earth give rise to potential nonlinearities in its response to temperature changes. So far, we are lacking a comprehensive stability analysis of the Antarctic Ice Sheet for different amounts of global warming. Here we show that the Antarctic Ice Sheet exhibits a multitude of temperature thresholds beyond which ice loss is irreversible. Consistent with palaeodata we find, using the Parallel Ice Sheet Model, that at global warming levels around 2 degrees Celsius above pre-industrial levels, West Antarctica is committed to long-term partial collapse owing to the marine ice-sheet instability. Between 6 and 9 degrees of warming above pre-industrial levels, the loss of more than 70 per cent of the present-day ice volume is triggered, mainly caused by the surface elevation feedback. At more than 10 degrees of warming above pre-industrial levels, Antarctica is committed to become virtually ice-free. The ice sheet’s temperature sensitivity is 1.3 metres of sea-level equivalent per degree of warming up to 2 degrees above pre-industrial levels, almost doubling to 2.4 metres per degree of warming between 2 and 6 degrees and increasing to about 10 metres per degree of warming between 6 and 9 degrees. Each of these thresholds gives rise to hysteresis behaviour: that is, the currently observed ice-sheet configuration is not regained even if temperatures are reversed to present-day levels. In particular, the West Antarctic Ice Sheet does not regrow to its modern extent until temperatures are at least one degree Celsius lower than pre-industrial levels. Our results show that if the Paris Agreement is not met, Antarctica’s long-term sea-level contribution will dramatically increase and exceed that of all other sources.

Evidence for extreme export of Arctic sea ice leading the abrupt onset of the Little Ice Age
Martin Miles et al.
Science Advances, September 2020


Arctic sea ice affects climate on seasonal to decadal time scales, and models suggest that sea ice is essential for longer anomalies such as the Little Ice Age. However, empirical evidence is fragmentary. Here, we reconstruct sea ice exported from the Arctic Ocean over the past 1400 years, using a spatial network of proxy records. We find robust evidence for extreme export of sea ice commencing abruptly around 1300 CE and terminating in the late 1300s. The exceptional magnitude and duration of this “Great Sea-Ice Anomaly” was previously unknown. The pulse of ice along East Greenland resulted in downstream increases in polar waters and ocean stratification, culminating ~1400 CE and sustained during subsequent centuries. While consistent with external forcing theories, the onset and development are notably similar to modeled spontaneous abrupt cooling enhanced by sea-ice feedbacks. These results provide evidence that marked climate changes may not require an external trigger.

Emergence of the Southeast Asian islands as a driver for Neogene cooling
Yuem Park et al.
Proceedings of the National Academy of Sciences, 13 October 2020, Pages 25319-25326


Steep topography, a tropical climate, and mafic lithologies contribute to efficient chemical weathering and carbon sequestration in the Southeast Asian islands. Ongoing arc–continent collision between the Sunda-Banda arc system and Australia has increased the area of subaerially exposed land in the region since the mid-Miocene. Concurrently, Earth’s climate has cooled since the Miocene Climatic Optimum, leading to growth of the Antarctic ice sheet and the onset of Northern Hemisphere glaciation. We seek to evaluate the hypothesis that the emergence of the Southeast Asian islands played a significant role in driving this cooling trend through increasing global weatherability. To do so, we have compiled paleoshoreline data and incorporated them into GEOCLIM, which couples a global climate model to a silicate weathering model with spatially resolved lithology. We find that without the increase in area of the Southeast Asian islands over the Neogene, atmospheric pCO2 would have been significantly higher than preindustrial values, remaining above the levels necessary for initiating Northern Hemisphere ice sheets.


from the


A weekly newsletter with free essays from past issues of National Affairs and The Public Interest that shed light on the week's pressing issues.


to your National Affairs subscriber account.

Already a subscriber? Activate your account.


Unlimited access to intelligent essays on the nation’s affairs.

Subscribe to National Affairs.