Climate risk is financial risk. The town of Paradise, California and its bondholders know this well.
In 2018, Paradise experienced one of the most destructive and deadly wildfires in California’s history — a fire made more intense by climate change-driven weather conditions. Years after the Camp Fire destroyed 11,000 homes, the town told bondholders it was short on funds to repay $5 million in bond debt due to loss of tax revenue. The city saw its bond rating slashed, and it ultimately defaulted.
The financial fallout in Paradise following climate-driven disaster is expected to happen with greater frequency as the planet continues to warm. Bond fund managers are increasingly considering climate risk as a factor in lending.
How will cities respond? University of Sheffield Assistant Professor of Environment Savannah Cox researches the ways in which finance shapes how climate change plays out in cities. She describes two general forms of adaptation and resilience that are emerging as municipalities begin to respond to risk:
- A “fortress model,” also described by other researchers, where localities leverage private markets to invest heavily in protecting material assets, with a goal of generating revenue to continue to pay for adaptation. Example: Miami, Florida, which has issued a $400 million bond to fund adaptation and resilience efforts.
- And “adaptation under aid,” in which cities and towns that lack the resources to adapt through private markets, end up relying on government aid to do so. In this situation, governments control what resources cities receive for adaptation, and how and where adaptation happens.
ClimateCheck interviewed Cox for deeper insights into how climate change is impacting local government financing and how different cities are adapting to climate change. Cox is leading a project on the role of finance in city climate adaptation with C40 Cities. The project has put out a call for papers in the Journal of Climate Policy and Economy.
ClimateCheck: What do adaptation and resilience mean to you in your research?
University of Sheffield Assistant Professor of Environment Savannah Cox: If things were perfect, urban adaptation and resilience would be the result of deliberate planning with a sharp understanding of the future based on trusted climate models and simulations. Governments would produce sensible, proactive, long-term adaptation and resilience plans that prepare cities for extreme weather, ensure the operations of essential infrastructures as the climate changes, and prioritize socially vulnerable groups. They’d also have the financial resources and political will to ensure the plans are actually implemented and maintained.
In practice, adaptation and resilience mark this sphere of intense debate over who or what is responsible for addressing the effects of climate change and why, and how to go about acting on that responsibility. One person might say this city is dependent on development, so the downtown must be made resilient. Others might suggest that past development practices have created all kinds of climate vulnerability, and resources must be directed to those who have not benefited from development. Then you have resilience officers who have to figure out how to pay for whatever comes of these debates and make people care about projects that may take a while to generate any meaningful kind of return. It’s really messy, and that’s what makes adaptation and resilience planning both interesting and important.
ClimateCheck: It seems like communities, cities, counties, and states are all at different places in their journey to build resiliency plans. Why is there such a range of approaches, and how do you see it all playing out?
Cox: There’s variance because cities vary. Cities have different adaptation needs, constraints, and political economies. That said, I think we’ll start to see distinct forms of resilience and adaptation across them. One is what others and myself have described as a “fortress” model, where significant concentrations of material assets receive a ton of physical infrastructural protection from climate change to remain valuable, and you keep developing to generate enough revenue to continue to pay for adaptation. Think of Miami and Miami Beach.
Another form is what I call “adaptation under aid,” which we’re likely to see in smaller cities that lack resources to tap into private markets for adaptation resources. Governments will be in a position to choose which cities will receive support for adaptation, the kind of support they receive, and why.
Take New Orleans, for example. After Hurricane Katrina, the city saw significant out-migration, plus drops in property values, budgets, and bond ratings. But the tourism sector was economically important beyond the city, which is one reason why it received federal funds and grant money for recovery and resilience that continue to prop it up, while also directing what adaptation and resilience projects look like and where they go.
The fortress model and adaptation under aid aren’t mutually exclusive. Governments are always going to play a role in adaptation. What matters is the relative rigidity or flexibility that specific forms of financing do (and don’t) provide when it comes to pursuing adaptation projects, and how that shapes who or what is protected from the effects of climate change and who or what is not.
ClimateCheck: What is the role of government in resiliency planning?
Cox: Beyond the obvious role of protecting residents from the effects of climate change, government provides and presides over the formal spaces where debates about who or what is responsible for addressing the effects of climate change take place. That includes less obviously political spaces like bond issuances, budgets, and property assessments as cities use these to pay for adaptation and resilience.
Governments also have the unfortunate task of weighing the credibility and importance of competing claims and interests when it comes to who is responsible. How they decide will never satisfy everyone and may even generate backlash that can derail what elements of adaptation and resilience plans that governments do secure funding and regulatory approval for.
ClimateCheck: What roles do politics, socioeconomics, and location play in a city’s ability to build adaptation plans?
Cox: These factors play a massive role in a city’s ability to adapt. Adaptation is often framed as a technical exercise to align projects with what climate models say are needed, but it’s never purely a technical question. Aspects like reaching consensus on relevant time horizons of adaptation, who or what deserves to be protected and why, and whether politicians can convince residents and businesses that investing in adaptation is a good thing to do—even if it means ripping up their yards or dealing with traffic during implementation and construction—all affect adaptation plans and how they play out.
There’s also the issue of whether a place seems “worthy” of adaptation, and that’s where stereotypes about specific places and social hierarchies come to play. Rural towns with small populations in climate-vulnerable places are not big economic drivers. They don’t produce “value” like Miami or New York, but they’re also not New Orleans, where you see population flight and economic decline, but also a vibrant, profitable tourism sector. The economic argument for propping up non-“valuable” places through adaptation investments may become weaker over time, and we may see fewer resources directed toward them. Adaptation in these cases may happen through other means, like outward migration and abandonment. This is also political, because it relates to who or what decides what value is and how it can be produced and observed in some places and not others.
ClimateCheck: Cities like Paradise and Miami have seen climate impact their bond ratings and debt worthiness in different ways. What can other cities learn from their stories?
Cox: In a place like Paradise, California, whose financials are already weak, rating agencies will obviously prefer a bond issuer use the resources it has to pay debts. And Paradise did have the resources due to a settlement fund it received after the fire. The fact that Paradise officials didn’t use them on debt really irked rating agencies, as it indicated a default risk. Paradise did default on repayments in June, so they weren’t exactly wrong.
At the same time, if you read the rating agency reports, it looks like Paradise officials were saying that the adaptation projects where they did direct settlement funds could bring people back to the town, reduce insurance rates, and generate revenue to help make those debt repayments. But Paradise is not exactly in a strong position to make those arguments because of its small size and slow economic recovery post-fire.
Right now, if you look at the financials, you could say that Miami’s property-driven approach is working. Its bond ratings have improved, its community rating score for public flood insurance is good, and property values remain high. Is this approach unsustainable? Yes. Is it generating and exacerbating inequality in the city? Absolutely. But many other cities would do the same if they could, because it’s really hard politically and technically to act with a longer view in mind, and to think about value in terms that exceed property.
In other words, the problem isn’t really Miami’s approach to resilience—which I’d describe as focused on property-driven, unsustainable growth—but the fact that this approach is what cities are after in general. To change that, you’re going to have to do a lot more than develop a resilience plan.
Tess Townsend is Director of Communications at ClimateCheck.
ClimateCheck empowers property buyers, owners, and brokers by revealing and quantifying climate-related risks through our proprietary risk assessments and reports. Our team of experts tap data from government, academic and other public and institutional sources, such as the Intergovernmental Panel on Climate Change, to assess assets for drought, heat, fire, flood and storm risk.