Economics: Economics of government as insurer of last resort for climate change adaptation.

Synthesis and Integrative Research Program
Researcher/s: 
Leo Dobes
Institution/s: 
Australian National University
Year Started: 
2012
State: 
ACT

This project will provide new insight into the economic, financial and distribution implications of government taking on the role of insurer of last resort for climate change adaptation. It brings together Australia's foremost climate change adaptation economists, policy analysts and modellers to identify the potential risks in government assuming the role of insurer of last resort. It will model and analyse the fiscal flows and the distributional implications, and potential tensions between the principle of subsidiarity and vertical fiscal imbalance, and develop proposals for obviating identified adverse fiscal effects where government does take on the role of insurer.

Abstract from final report

Individuals and societies have always adapted to change, whether catastrophic or slow onset. Over the last two centuries, however, governments have significantly extended their role as ultimate social manager of risk.  It is as yet unclear whether, how, or to what extent governments will add adaptation to climate change to their portfolio of responsibilities.  This report investigates this question on the basis of review and analysis of economic and policy thinking on the issues, and by using a new dataset on the 2011 Brisbane flood. 

Uncertainties about the future impacts of climate change obviate definitive conclusions about future adaptation actions and insights for specific situations cannot be generalised.  Economic precepts suggest that governments should limit intervention to cases of genuine market failure, such as the provision of information on likely impacts of climate change including at the local level, or to support for people affected by uninsurable events.  But any role as ‘insurer of last resort’ needs to be circumscribed by rigorous social cost-benefit analysis to ensure that government intervention is beneficial, in the context of the need to adapt to climatic changes.  Although the phenomenon of ‘government failure’ is generally ignored in the adaptation literature (and often by policy makers), it too can stymie efficient adaptation.  

A standard justification for government intervention is market failure, including misperception of risk by individuals and businesses.  We use Brisbane property prices before and after the January 2011 flood, as well as property-level flood risk information to test the hypothesis that buyers do not accurately perceive the risk of riverine flooding.  The results indicate that buyers do take risk into account, and even discriminate between zones of differing flood risk.  

The concepts of ‘government as insurer of last resort’ and ‘government as insurer of first resort’ as alternative forms of intervention in markets are examined with a view to disambiguation.  In contrast to much current thinking in academic and government circles, we conclude that the government should not act as an ‘adaptor of first or last resort’.  Rather, government can best contribute to efficient adaptation by reducing the economic costs and institutional barriers to adaptation faced by individuals and organisations.

Comprehensive micro-economic reform, and the promotion of institutional flexibility are potential ‘no regrets’ strategies because they will also promote economic growth and welfare.

Download the report here

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