Potential Increases in Hurricane Damage in the United States: Implications for the Federal Budget

Damage from hurricanes is expected to increase significantly in the coming decades because of the effects of climate change and coastal development. In turn, potential requests for federal relief and recovery efforts will increase as well. CBO has estimated the magnitude of the increases in hurricane damage and the associated amounts of federal aid if historical patterns hold. In addition, CBO examined three approaches to reducing the amount of such federal assistance: limiting greenhouse gas emissions; shifting more costs to state and local governments and private entities, thereby reducing coastal development; and investing in structural changes to reduce vulnerability to hurricanes. The accompanying working paper provides a detailed discussion of the data and methodology CBO used to estimate hurricane damage.

What Are CBO’s Estimates of Hurricane Damage and of Related Federal Spending?

CBO concludes that, over time, the costs associated with hurricane damage will increase more rapidly than the economy will grow. Consequently, hurricane damage will rise as a share of gross domestic product (GDP), which provides a measure of the nation’s ability to pay for that damage. According to the agency’s estimates, expected annual damage currently amounts to 0.16 percent of GDP (or about $28 billion); by 2075, however, that figure reaches 0.22 percent (equivalent to about $39 billion in today’s economy; see figure below). Roughly 45 percent of that increase is attributable to climate change and 55 percent to coastal development.

The percentage of the population exposed to substantial damage is likely to grow as well. In CBO’s estimation, less than 0.4 percent of the U.S. population, or about 1.2 million people, currently lives in counties where expected hurricane damage per capita is greater than 5 percent of the county’s average per capita income. By 2075, that share will rise to 2.1 percent of the population, or about 10 million people, CBO estimates.

In its analysis, CBO estimated annual federal spending for relief and recovery as a percentage of expected hurricane damage. If that percentage stays roughly the same as it has been over the past decade—a prospect referred to in this report as a historical cost scenario—it will rise from 0.10 percent of GDP under current conditions (equal to $18 billion) to 0.13 percent of GDP in 2075 (about $24 billion in today’s economy). If federal spending as a percentage of hurricane damage changed, those amounts could be larger or smaller.

How Did CBO Estimate Hurricane Damage?

CBO estimated the change in damage from hurricanes by comparing expected damage under current conditions with expected damage in selected future years—2025, 2050, and 2075—under the conditions that are expected to prevail at the time. Expected hurricane damage in any given year will depend on four conditions:

• Sea levels in different states,
• The frequency of hurricanes of various intensities,
• The population in coastal areas, and
• Per capita income in coastal areas.

For each set of conditions, CBO estimated expected damage using commercially developed, state-of-the-art “damage functions” (which translate hurricane occurrences, state-specific sea levels, and current property exposure into state-specific expected damage) and the agency’s own assessment of the relationship between changes in population and per capita income and changes in hurricane damage.

Two of the four conditions—sea levels and the frequency of hurricanes—are affected by climate change. Strong consensus exists within the scientific community that climate change, the result of growing emissions of greenhouse gases worldwide, will cause sea levels to rise, leading to more-destructive storm surges. The effect of climate change on hurricanes is less certain, but scientists find that it could increase the frequency of hurricanes in the North Atlantic, particularly the most intense categories of hurricanes.

The other two conditions—population and per capita income in counties that are vulnerable to damage from hurricanes—are affected by coastal development. Ongoing trends in coastal development will similarly exacerbate hurricane damage, even in the absence of any increase in sea levels or in the frequency of hurricanes.

In its analysis, CBO used projections made by leading researchers to construct distributions (indicating the range and probability of alternative outcomes) of future sea levels and the frequency of hurricanes. The agency used its own projections to construct distributions of population and per capita income. On the basis of those projections, CBO constructed a distribution of expected damage for each future year considered in this report by conducting thousands of simulations. Each simulation included a unique set of draws (random selections) from the distributions of the four underlying conditions and yielded an estimate of expected damage based on those draws.

How Did CBO Estimate Future Federal Spending Related to Hurricane Damage?

Federal aid that is provided following hurricanes supports emergency relief operations, long-term recovery activities, and a variety of programs that are designed to improve the resiliency of infrastructure and to prepare communities for future disasters. Most such spending is not mandated by law; rather, it is the outcome of decisions made by policymakers in the aftermath of disasters and is funded primarily through supplemental appropriations.

Federal spending in response to hurricanes varies from storm to storm. However, measured as a percentage of total damage—estimates of which are produced by the National Oceanic and Atmospheric Administration (NOAA)—such spending has averaged about 60 percent for the nine hurricanes that made landfall since August 2005, when Hurricane Katrina struck the Gulf Coast. For CBO’s historical cost scenario, the agency estimates that federal expenditures would continue to average 60 percent of total damage from hurricanes.

What Policies Might Decrease the Pressure for Federal Spending in the Aftermath of Hurricanes?

In considering how to ease the pressure to spend federal dollars on relief and recovery from hurricane damage, CBO examined three diverse approaches.

Limit Greenhouse Gas Emissions. A coordinated global effort to significantly reduce emissions could lessen hurricane damage in the United States between now and 2075, but the extent of the reduction would be uncertain and it would probably occur in the latter half of this century because the rise in sea levels has already been set in motion and would be hard to slow down. However, a significant reduction in U.S. greenhouse gas emissions, without corresponding decreases in the emissions of other large economies, would probably not reduce hurricane damage appreciably between now and 2075, in part because U.S. emissions constitute a shrinking share of global emissions.

Shift More Costs to State and Local Governments and Private Entities, Thereby Reducing Coastal Development. CBO projects that, continuing historical trends, the population in coastal areas will grow more rapidly than in the United States as a whole. To the extent that households, businesses, and state and local governments in coastal areas do not bear the full cost of hurricane damage, such growth is subsidized by U.S. taxpayers in general. Boosting the share borne by private and public entities at the state and local levels would give people an incentive to more fully account for expected hurricane damage when choosing where to live and locate businesses, thereby reducing development in vulnerable areas. Policies that would accomplish those goals include the following:

• Expanding the use of flood insurance and raising premiums to more accurately reflect the costs of expected damage;
• Increasing the minimum amount of statewide per capita damage that is the primary consideration for providing federal assistance; and
• Reducing the share of costs borne by the federal government (as opposed to state and local governments) for assistance provided from the Federal Emergency Management Agency’s (FEMA’s) Disaster Relief Fund (DRF), which accounts for roughly one-half of federal spending on relief and recovery from hurricanes.

Invest in Structural Changes to Reduce Vulnerability to Hurricanes. In recent years, federal agencies have placed a greater emphasis on measures designed to reduce vulnerability to future hurricane damage, such as elevating roads and using flood-resistant building materials. Such hazard-mitigation measures typically increase the up-front costs of construction or restoration but reduce costs associated with future damage. To the extent that up-front investment pays off, the federal government could reduce its hurricane-related spending by undertaking more hazard mitigation or by providing incentives for individuals, businesses, and state and local governments to do so.