Mismatch: Can Our “Old Capital” Stock Handle New Climate Shocks?

Buildings and infrastructure represent durable capital but they require ongoing maintenance and eventually they will be replaced.   Climate change increases the risk of nasty weather events that increase the wear and tear on such past investments.  Think of the Metrodome collapse in December 2010.  This article  neatly lays out some of the issues moving forward as engineers ponder more stringent building codes.  The big private and public decision here is investment in the face of uncertainty over climate change’s impacts.  I explore many of these issues in my 2010 Climatopolis book.   

 Similar to what I argue in Climatopolis, the author is optimistic that richer people and nations will make investments to protect themselves.

“In most parts of the developed world, people will probably make the necessary adjustments. This winter, travelers were stranded for days at airports in parts of Europe and the United States, as severe snowstorms interrupted flights. But, Dr. Hoeppe noted, air traffic continued almost normally in places like Helsinki, Finland, which is used to heavy snows. “Perhaps we’ll have to learn to deal with more snowfall — extreme snowfall,” he said. “We’ll have to get used to that.”

The insurance industry has the profit motive to incentivize the insured to take precautions to minimize the damage that future volatile storms will cause.  

The challenge here is in the developing world.  My previous work on deaths from natural disasters highlights the differences in deaths that rich and poor nations suffer from the same shock.  To protect people from climate change, we need more economic development.

“There’s not enough money to design for every eventuality,” said Mr. Klotz. “You try to design for the worst-case scenario. But the question now is, what you can expect?”

So, this is the key issue.  The climate scientists need to make progress on quantifying the new risks we face and then rational investors will respond to demand homes and structures that can withstand these blows. On the supply side, there will be strong innovation incentives to deliver these needed new products.

I agree that it is impossible to “prove” that climate change causes any specific weather event.  I do believe that the variance of weather events (extreme temperature events and rain events) will increase because of climate change.  The question is whether we have the tools at hand to defend ourselves against these “fat tail” events?  Richer people with more responsive governments will have such tools.  The climate scientists give us an “early warning” system that gives us the planning time to be prepared.

We have to rebuild our cities.  We will even rebuild Detroit.  How we build this infrastructure will play a key role in how climate change affects our quality of life.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

16 thoughts on “Mismatch: Can Our “Old Capital” Stock Handle New Climate Shocks?”

  1. So, we ignore the externalities driving climate change. We re-double the patterns of economic development that generate those externalities, further accelerating climate change. And, on and on, spiraling downward. That’s your plan?

  2. Of course, there should be a two-pronged approach – both adaptation and mitigation. Adaptation would be to retrofit our wasteful extant buildings to some decent standard, such as the IBC code that is the model for WA state’s program(1), which leads to savings such as outlined here(2). Adaptation only without mitigation is a fool’s game.

    1. http://switchboard.nrdc.org/blogs/kkennedy/energy_efficiency_victory_help.html

    2. http://pubs.acs.org/doi/abs/10.1021/es102641n

  3. Rational investors don’t exist and quantifying new risks in a chaotic system is extremely difficult beyond what we already know: “weather patterns will change.” May I attempt to summarize your book: “if we know more about what will happen in the future, we may be able to do more to prepare”? Yawnsville, tell me more about how people want to see into the future. Also, the link you posted to your book doesn’t work, it leads to a generic link site.

  4. For an economsit you really don’t understand opportunity cost. Paying more and more for the same thing is a happy circumstance.

  5. I’d be interested in hearing what you think an appropriate strategy would be towards, to take only one example (but a rather important and interesting one, I think), the ongoing destruction-through-neglect of Detroit’s capital stock. (As wonderfully pictured here.) Insofar as climate change should make Detroit relatively more attractive in 50-100 years, and insofar as building new cities from scratch is more costly than repopulating depleted ones, it looks like the Detroit … situation … is a clearly suboptimal outcome, no? But What Is To Be Done?

  6. Nuclear war is another thing that people worry about excessively. After all, nuclear war, like climate change, won’t repeal the human desire to survive and adapt, and wouldn’t necessarily end economic growth, provided the war were small enough. As Yglesias has already pointed out, the “Great Depression, Stalin’s Great Terror, the Holocaust & World War II, the partition of India, etc” all managed to take place without wiping out the human race, or even stalling aggregate economic growth over the very long term.

  7. Actually, that Time slideshow is an annoying way to view the pictures–best go to the photographers’ website, here, instead. Beautiful and horrifying.

  8. Were the 4 separate collapses of the Metrodome roof between 1981 and 1986 caused by climate change? Was the lack of a collapse of the Metrodome roof for the next 24 years caused by climate change? Or is it just the 2010 collapse of the Metrodome roof caused by climate change?

  9. The plan here for MK is to sell books , not to engage in reasonable discourse (of course, there may be a problem with reasonable discourse if one is simply incapable

    Note the continual drumbeat of “I say this here…” with the appropriate URL to go buy the book.

  10. Really, Mr. Pollack? Thus far in Mr. Kahn’s succession of optimism-via-capitalism advertisements for his book, I have yet to see him grapple with the hard questions that distinguish climate change from, say, water policy. Which is why I keep mentioning the global failure to save fisheries, and Mr. Kahn keep posting and reposting these advertisements with nary an answer. That’s boring, not interesting.

  11. This article neatly lays out some of the issues moving forward as engineers ponder more stringent building codes.

    How dare big government tell me how to build a house. You know what an elephant is? A mouse built to government specs. I don’t need no big damn government to check my grammar or to tell me how to do anything. More stringent building codes? There you go again, stifling business creativity and the marketplace.

  12. Matthew:
    There are a number of building codes from places like Florida, born from the experiences of horrific hurricanes that can and are adopted elsewhere at little cost. Why should any roof be built that does not comply with high wind standards. The costs are pretty trivial.

    There are a whole other set of other standards, such as those form Passivhaus which should be driven into the marketplace to perhaps help forestall the worsening climate situation, while at the same time providing a hedge against the depletion of fossil fuels and the potential astronomical rise in fuel prices.

    One of the key roles that regulation needs to play is one of honest broker; laying out the methods and technologies which are effective from those which are driven by advertising budgets. There is a crying need to educate both the buyers and providers of housing and other buildings. There needs to be a regimen of testing built in that verifies that what is delivered is functioning according to specs. It isn’t enough that the house doesn’t fall down in a faint breeze.

    @AynRand’s Superman: We can live well without your creative buildings. It would be one thing if the marketplace enforced some form or another of accountability without leaving a trail of functionality deficient and even dangerous structures behind.

    At a time when building activity is at record lows, is an optimum time to examine and change the building practices of the past.

  13. @RickG: as germane an example are places like WA state, which adopted the IBC some years ago. Their building envelopes as a result are comparatively well-insulated and efficient. Not sure the market would have moved in that direction any time soon…

  14. Why should any roof be built that does not comply with high wind standards. The costs are pretty trivial.

    Freedom®, that’s why.

    (Freedomâ„¢ is a registered trademark of the Republican National Committee. All rights reserved. Used with permission.)

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