Firefighters battling the inferno in Pacific Palisades, an upscale community in Los Angeles.
One quarter of a trillion dollars. This is AccuWeather’s estimate of the cost of damages and economic loss from the L.A. wildfires, which continue to rage as I write. If this estimate turns out to be accurate, the economic fallout from the L.A. fires will exceed the costs of Hurricane Helene last year and of the entire 2020 wildfire season.
The media carried politicized reports of empty hydrants, which were blamed on irresponsible government officials. While finding villains to shame may satisfy some, we must accept that our cities were built to withstand “normal” conditions which climate change has ensured will never occur again.
Our infrastructure was built to survive adverse events of severity and probability forecasted in the mid-20th century. A former chief engineer at the LA Department of Water and Power quoted in the New York Times noted that the reservoir system serving LA’s hillside neighborhoods was designed to provide water to fight a few homes on fire, not hundreds. We cannot rely on strategies from a bygone time; the L.A. Fires exemplify our desperate need to adapt to our harsh new climate.
Los Angeles is the most recent example, but evidence that climate change is pushing extreme weather events out of civilization’s comfort envelope is everywhere. Climate extremes are affecting everything, from tax revenues to food prices to interest rates to electrical grid stability.
Wildfires represent one of many climate change adaptation challenges
Bloomberg reported last year that the cost of increasingly severe climate disasters threatens to deplete FEMA’s disaster aid. I pointed out a few years ago in my article Climate Change Will Eat Your Bond Portfolio that post-disaster climate migration negatively impacts municipal tax revenues. A smaller tax base makes it harder for cities to rebuild and makes municipal bonds riskier.
This chart on NOAA’s website stood out to me. Note that four of the top six most expensive years … [+]
Bond yields are not the only potential impact. The Financial Times reports that crop yields are suffering from climate impacts, driving up global food prices. While central banks usually exclude volatile food and energy prices when considering discount rate changes, bankers may need to start pricing climate change into their interest rate models.
The New York Times reports that Ecuador’s electrical grid has faced severe stress because water shortages attributed to climate change cripple the country’s hydroelectric dams, which comprise nearly two-thirds of the country’s generation capacity. The Times reports that more than one billion people live in countries where more than 50 percent of their energy comes from hydroelectric plants, while hydropower is expected to become less reliable as extreme weather events like drought and flooding become more frequent and severe.
Hydroelectric power is not the only concern. A BloombergNEF analysis suggests that projected increases in electricity demand in China and the U.S. alone will require at least $2 trillion in grid improvements.
Adaptation strategies are key
The Industrial Revolution spurred phenomenal increases in technology, wealth, and well-being, but also unleashed a process that is pushing our climate out of the Goldilocks zone that enabled the Industrial Revolution in the first place. We must now prioritize adaptation and resiliency rather than growth for growth’s sake.
What does “adaptation” look like? The easiest and quickest step to take is to make sure that the critical infrastructure we have in place is in good working order (for power infrastructure, a company like Buzz Solutions, which I profiled in this column last September, is a good example of a startup working to do this). Next, we must bite the bullet and start redesigning critical infrastructure to meet our new climate challenges. Finally, we must find a way to encourage retrofitting older homes and commercial buildings for a hotter world—improving insulation to conserve energy, using building materials that are less flammable, more resilient to high winds, and less dependent on long supply chains, and making modifications to rely more on passive heating and cooling.
The EU’s Copernicus program announced that 2024 was the hottest year on record, with a global average temperature 1.6°C above the pre-Industrial era. Though we consider 2024 a hot year looking back, we will likely consider it a mild year looking forward.
As we move into this 1.5°C+ world, disasters like the L.A. wildfires are likely to become perennial occurrences rather than rare one-off events. We must adapt to the new climate reality. Intelligent investors take note.