Summary

Floods are among the most damaging natural disasters in the United States. Flood adaptations are projects aimed at preventing damage from flooding, either by lowering the risk that floods will occur or by reducing the amount of damage that floods can inflict. Flood adaptations can take many forms, from levees and beach restoration to structural elevations or buyouts of property. They may be overseen by different agencies and may protect individual properties or entire communities near rivers or coasts. In this report, the Congressional Budget Office provides estimates of flood damage and examines the benefits and costs of adaptations.

How Much Flood Damage Is Expected in the Future?

Damage from flooding in the United States has averaged $46 billion (in 2023 dollars) per year over the past decade. By 2050, CBO expects changes in climate conditions to increase flood damage by one-quarter to one-third (in inflation-adjusted dollars). Coastal development, spurred by economic growth and population growth, is also expected to contribute to damage from flooding in the future.

How Much Does Spending on Adaptations Reduce Damage From Flooding?

Appropriations for flood adaptations have increased over the past several years, from approximately $5 billion in 2019 to $15 billion in 2022, when $7 billion in additional funding was provided through the Infrastructure Investment and Jobs Act (Public Law 117-58).

The Army Corps of Engineers, the Federal Emergency Management Agency (FEMA), and the Department of Housing and Urban Development (HUD) are the three agencies that currently provide most funding for flood adaptations. Historically, more than half of the funding from annual appropriations for flood adaptation has typically gone to the Corps, which largely funds the construction of infrastructure that protects communities, such as dams and levees. FEMA, by contrast, principally funds property-level adaptations, such as elevations and buyouts. In 2018 and 2019, lawmakers also provided supplemental appropriations totaling $16 billion for Community Development Block Grant Mitigation (CDBG-MIT) grants. Those grants, administered by HUD, help safeguard utilities and other local public infrastructure in addition to funding community- and property-level adaptations.

The effects of specific adaptation projects can vary widely. Using the Army Corps of Engineers’ benefit-cost analyses, CBO estimates that expected savings from the Corps’ flood adaptation projects averaged $3 per dollar of spending. CBO’s assessment of FEMA’s flood adaptation projects indicates roughly $2 in expected reductions in damage for every dollar spent. However, FEMA’s analytic methods make those estimates less certain than estimates based on the Corps’ analyses. HUD has adopted a review process for large-scale flood adaptations that is similar to FEMA’s, but estimates of the expected savings are not available.

When cost-effectiveness guides the selection of flood adaptation projects, the expected savings are typically greater than when other criteria are used. Nevertheless, any program’s spending on adaptations is likely to have diminishing returns after the most advantageous projects have been completed. Adaptation projects’ effects on flood damage may be larger or smaller than anticipated for many other reasons as well.

Overall, in CBO’s estimation, spending for flood adaptations reduces expected damage by an average of $2 to $3 per dollar spent, depending on the agency overseeing the spending. However, CBO’s cost estimates for bills that would provide funding for flood adaptations do not reflect reductions in spending for disaster relief or other federal programs. That is because scorekeeping rules and guidelines created by lawmakers prohibit those potential savings from being counted in CBO’s estimates of the budgetary impact of the legislation.

Who Gains From Reductions in Damage?

On the basis of expected flood losses and historical government spending patterns, CBO estimates that households face about half of the expected costs from flooding, and the federal government would probably take on roughly a third. Businesses and state and local governments are also expected to be affected, but to a lesser extent.

For households, flood adaptations decrease damage to homes and personal property and lessen the need for temporary housing. For the federal government, flood adaptations decrease damage to federal buildings and to federally supported infrastructure such as roads; they may also reduce the demand for federal relief spending. Businesses suffer less property damage and fewer losses from business interruptions as a result of adaptations, and state and local governments experience less damage to state and locally owned infrastructure and may see an increase in property tax revenues if the value of adaptations is reflected in property values. The net effects on private insurers are unclear. Of course, the effects of specific programs and projects on households, governments, and businesses will vary depending on the location and the nature of the adaptations.

Damage From Flooding

Over the past 10 years, damage from flooding has amounted to $46 billion (in 2023 dollars) per year, on average. Taking into account climate conditions that are considered likely to be prevalent in 2050, CBO expects damage to increase by one-quarter to one-third by that year.

Why Focus on Floods?

Next to wind, floods have been the largest source of damage from disasters over the past 10 years (see Figure 1). Though often associated with hurricanes, flooding can result from a variety of other natural phenomena—rising sea levels, storm surges (in which water is pushed ashore by the winds of a storm), accumulating rainfall, and overflowing rivers and streams. About 17 million properties in the United States face at least a 1 percent chance each year of suffering a foot or more of flooding; over a period of 30 years, those properties have about a 25 percent chance of experiencing at least one such flood.1

Most homeowners and business owners have property insurance that covers damage from wind and fire, but not damage from flooding. To help fill that gap in coverage, the federal government offers flood insurance through the National Flood Insurance Program (NFIP). However, many people do not purchase such insurance.2 That may occur, among other reasons, because areas at risk can go many years without experiencing a flood and because the risk is not readily apparent.3

As a result, the federal government often spends money for disaster relief when floods occur. The extent to which federal disaster relief has covered the costs of disasters has varied. Federal spending in response to hurricanes from Katrina in 2005 to Sandy in 2012 averaged about 60 percent of the damage suffered.4 For hurricanes that struck between 2013 and 2019, that share averaged about 40 percent. Since 2000, federal assistance has typically covered larger shares of the costs of hurricanes that cause more damage than of hurricanes that cause less damage (see Figure 2).

Estimates of Flood Damage

CBO’s estimate of $46 billion in average annual damage caused by flooding over the past 10 years reflects several types of costs:

• The replacement of residential and commercial property;
• Repairs to or rebuilding of public infrastructure;
• Emergency response measures;
• Costs associated with the ongoing loss of the use of property (for example, the provision of temporary housing);
• Losses in the commercial sector due to business interruptions;
• Damage to crops, livestock, and timber; and
• Damage to offshore energy facilities.

Floods also result in injuries and deaths, and they may have significant effects on people’s quality of life that are not readily measured in dollars. Because those costs are not usually eligible for compensation through federal disaster relief spending, they are not included in CBO’s estimates of the costs of flood damage.

Other estimates of annual flood damage range from $30 billion to $60 billion.5 Some of the smaller estimates do not include compensation for the loss of the use of property, damage to public infrastructure, or damage to crops, livestock, timber, or offshore energy facilities. Larger estimates add possible indirect effects of flooding on the economy beyond the loss of the use of property (such as losses to suppliers when a business closes down after a flood). And some estimates are based on models of expected flood damage rather than actual damage.

Actual flood damage can vary substantially from year to year. Floods and hurricanes—particularly the most intense of those disasters—occur infrequently and irregularly. When disasters do strike, the damage they cause depends on their location and timing. A hurricane that makes landfall near a city at high tide, as Hurricane Sandy did in 2012, will result in far more damage than a hurricane that hits an unpopulated coastline at low tide.

Actual damage exceeds expected damage in exceptionally high-cost years, but in most years it falls short of expected damage. Unlike actual damage, expected damage is constant for a given set of climatic, economic, and demographic conditions. It reflects the average frequency of storms and the average damage that storms would inflict depending on sea levels and coastal-development conditions.6

By 2050, flood damage is projected to increase by one-quarter to one-third (in inflation-adjusted dollars), largely as a result of higher sea levels, more intense storm surges, and other effects of climate change.7 Sea levels on the coasts of the contiguous United States are projected to rise by about a foot, on average, from 2020 to 2050.8 That projected 30-year increase in sea levels is close to the increase that occurred over the prior 100 years. Over the same 30-year period, sea levels on the coasts of Florida, Texas, and Louisiana—states that represent three-quarters of expected hurricane damage—are projected to rise by even more.

CBO’s analysis suggests that growth in coastal development could increase the costs of flood damage as much as or more than climate change will.9 The Office of Management and Budget estimates that together, climate change and coastal development will lead to roughly a 70 percent increase in annual federal spending for coastal disaster response activities by 2050.10

However, the extent to which commercial development will continue to grow in high-risk areas is uncertain. Population growth tends to be slower than it would otherwise be in places with more flood risk.11 And recent analyses indicate that houses in areas with more flood risk have lower prices than comparable houses in otherwise similar areas with less flood risk, particularly when buyers are likely to be aware of the risk (such as when flood zone disclosures are required).12 Lower prices in those areas discourage additional development.13 That said, in some places where flooding has damaged houses, buyers have come in to take advantage of the coastal amenities at discounted prices, and property prices have eventually rebounded despite the continued risk of flooding. Moreover, in some desirable coastal locations at risk of flooding, properties sell at a premium despite the risk.

Federal Spending for Disaster Relief

Historically, most federal spending for relief from natural disasters has been funded by supplemental appropriations enacted in response to specific disasters. Such supplemental appropriations for the Army Corps of Engineers and for FEMA, which typically receives the bulk of disaster relief funds, have averaged $22 billion a year (in 2023 dollars) since 2005.14 Over the past five years, annual appropriations have also represented a substantial portion of disaster relief funding, with the Corps and FEMA receiving a combined average of $24 billion per year.

Since 2005, hurricanes have prompted large amounts of supplemental funding for the major accounts of the Corps and FEMA’s Disaster Relief Fund. The largest of those supplemental appropriations were provided in 2005, when lawmakers approved $100 billion (in 2023 dollars) to respond to Hurricanes Katrina, Rita, and Wilma (see Figure 3).

FEMA’s two main disaster relief programs are the Public Assistance Program and the Individual Assistance Program. The Public Assistance Program has accounted for 54 percent of the agency’s disaster relief spending for nonpandemic disasters since 2017; it reimburses state and local governments for emergency protective measures, debris removal, and infrastructure repair or replacement. The Individual Assistance Program has accounted for 13 percent of such spending; it mainly funds temporary housing, repairs to homes, and replacements of personal property such as furniture and appliances. (It does not necessarily cover those costs in full.) The Army Corps of Engineers’ disaster relief efforts are comparable to those of the Public Assistance Program. Spending for adaptation, which is discussed further below, has historically made up less than 10 percent of disaster relief spending by FEMA and the Corps.

Other forms of federal relief after natural disasters include the following:

• Low-interest physical damage loans from the Small Business Administration (SBA) to homeowners, renters, businesses, and nonprofits. These loans are for repairing or rebuilding disaster-damaged real estate and replacing personal property. SBA’s Economic Injury Disaster Loans, for example, are available to businesses and private nonprofits that need working capital for everyday expenses (such as maintaining inventories or meeting payroll) in the wake of a disaster.
• Payments to agricultural producers, such as those provided by the Department of Agriculture’s Emergency Relief Program, and other forms of federal crop insurance.
• HUD Community Development Block Grant Disaster Recovery grants, which are designed to fill gaps not addressed by other federal disaster relief programs. For example, the grants may subsidize job training and workforce development to address job losses or improvements to commercial districts to address local losses in tax revenues. Some eligible expenses are similar to those covered by other programs, including repairs to homes and infrastructure damaged by disasters and assistance to affected business owners.
• Subsidies provided by the federal government to the National Flood Insurance Program (which are currently being phased out).
• Payments to support income security, such as those provided through the Disaster Unemployment Assistance program and Social Security Disability Insurance.

Adaptations and Their Effects on Expected Damage From Flooding

Flood adaptations can reduce damage from floods that is expected to occur in the future. The Army Corps of Engineers usually builds community-level adaptations such as dams and levees and makes improvements to water channels. FEMA funds property-level adaptations such as elevations of structures and buyouts, in addition to providing community protections. CDBG-MIT grants help protect utilities and other local public infrastructure and also fund community- and property-level adaptations.

Although the effects of individual adaptation projects can vary widely, benefit-cost analyses by the Corps indicate that for each dollar of spending, two-thirds of its projects (excluding those with the highest and lowest one-sixth of benefit-cost ratios) were expected to reduce flood damage by a total of $2 to $6 (in present value) over a 50-year project lifetime.15 The average expected reduction from those projects was $3 per dollar spent. In CBO’s assessment, FEMA’s adaptation projects reduce future flood damage by roughly $2 per dollar of spending, on average. Estimates of the expected savings from projects funded by CDBG-MIT grants are not available.

Key Characteristics of Flood Adaptations

Adaptations to reduce damage from flooding can be characterized in several ways. Key characteristics include the location and scope of the project, the nature of the approach to adaptation (that is, whether it involves reducing risks or removing people and properties from flood-prone areas altogether), and, for adaptations that involve the construction or installation of infrastructure, the type of infrastructure involved.

Location: Riverine or Coastal. Of the 17 million properties in the United States facing at least a 1 percent chance each year of flooding, about 13 million are inland properties and about 4 million are coastal.16

To reduce damage caused by flooding from rivers, known as riverine flooding, the federal government builds dams and levees and makes other improvements to water channels, such as river deepening (see Figure 4). It also funds stormwater management infrastructure (such as pumping stations and retention basins), property elevation, and property buyouts.17

To reduce damage from coastal flooding, the federal government funds adaptations such as storm-surge breakwaters, levees, floodwalls, beach restoration, and protective natural features such as shoreline vegetation and oyster beds (see Figure 5).

Scope: Community or Property Level. Some adaptations, such as dams and levees, protect entire communities. Others, such as property elevation, buyouts, and relocation, protect individual properties. And in some cases, adaptations protect community infrastructure, such as hospitals or utilities.

Approach: Risk Reduction or Avoidance of Flood-Prone Areas. Adaptations such as dams, levees, channel improvements, and property elevation are intended to reduce the risk that properties will be flooded. Other adaptations, such as land conservation and the buyout and relocation of existing properties, keep people and buildings out of flood-prone areas.

Type of Infrastructure: Gray or Green. Built adaptations (for instance, dams, levees, and seawalls) are sometimes called gray infrastructure; adaptations that augment natural features (such as by preserving or restoring beaches, shoreline vegetation, wetlands, coral reefs, or oyster beds) are termed green infrastructure. Sometimes nature-based approaches to flood risk reduction offer additional benefits, such as erosion reduction or improvements in water quality or fish habitats.

Federal Spending for Flood Adaptations

Since the early 20th century, the federal government has taken steps to reduce losses from floods. Today, a portfolio of federal programs fund adaptation projects that lower flood risk through a variety of approaches. In 2022, funding through those programs amounted to $8 billion, and an additional $7 billion was provided through the Infrastructure Investment and Jobs Act.

The Army Corps of Engineers, FEMA, and HUD are the three agencies that spend the most on flood adaptation measures. The Corps and FEMA receive appropriations for those purposes on a regular basis. HUD received large amounts of funding for adaptation grants in 2018 and 2019 but has received no appropriations for that purpose since then.

Other agencies receive smaller amounts of funding for flood adaptation—for example, the Department of Agriculture, which pays for watershed and flood prevention projects, and the National Oceanic and Atmospheric Administration, which supports coastal resilience efforts.18 State and local governments are also usually required to share in the cost of federal flood adaptation projects.

Army Corps of Engineers Accounts. The Corps pays for flood adaptations through a construction account and a separate account focused specifically on activities related to the Mississippi River and its tributaries. From 1994 to 2023, the construction account received annual appropriations averaging $2 billion (in 2023 dollars). Appropriations for the Mississippi River and Tributaries account averaged $500 million (in 2023 dollars) over that period. Some of the funds from those accounts are used to finance projects that reduce floods, protect shorelines, and restore aquatic ecosystems along rivers and coasts. Examples include the construction of a levee and floodwall system in Louisiana and projects to restore the Everglades in Florida. Other uses for funds from those accounts include projects that improve navigation on waterways (for example, harbor dredging).

The Corps’ spending for flood adaptations has been almost entirely devoted to community-level adaptations. Of $910 million (in 2023 dollars) spent each year, on average, for flood-specific construction activities over the 2019–2023 period, roughly two-thirds went toward levees and dams (see Figure 6). Water channel improvements, such as channel deepening or widening and flood control gates, received a smaller share—about a quarter. A very small share (about 1 percent) was used to protect individual properties through elevation or buyouts. Most of the spending was used to guard against riverine flooding, but a small portion went toward beach restoration and other protections for coastal areas.

Federal Emergency Management Agency Programs. The three main FEMA programs that guard against flood damage are the Hazard Mitigation Grant Program (HMGP), the Building Resilient Infrastructure and Communities (BRIC) program (formerly the Pre-Disaster Mitigation, or PDM, program), and the Flood Mitigation Assistance (FMA) portion of the National Flood Insurance Program.19

Taken together, the three programs spent $752 million (in 2023 dollars) per year, on average, from 2015 to 2019 (the most recent year for which data for all three programs are available).20 Roughly half of those funds were devoted to property-level adaptations; community-level adaptations and protections for local infrastructure received approximately one-eighth each (see Figure 7). The remaining quarter went to planning and management costs, technical assistance, and other miscellaneous expenses.

Property-level projects were primarily buyouts and the elevation of houses. Community-level projects mainly involved stormwater management and the construction of flood control structures such as retention basins, floodgates, floodwalls, and levees; the restoration or creation of natural features such as wetlands, streams, and vegetation; and the reinforcement of shoreline features using riprap (layers of stones that protect against erosion) or other materials. Infrastructure protection projects helped safeguard, for example, electric power systems, water and sewer systems, and roads and bridges. Like the Corps, FEMA used most of its spending (80 percent) to protect against riverine flooding.

Hazard Mitigation Grant Program. FEMA’s HMGP provides funding to state and local governments after a Presidentially declared disaster to develop hazard-mitigation plans and rebuild in a way that reduces losses from future disasters. Eligible projects include the construction of levees and floodwalls, drainage improvement and slope-stabilization projects, retrofits or other enhancements of flood protections for public utilities, the elevation of structures, property buyouts, the development of required hazard-mitigation plans, and other management and postdisaster code-enforcement activities. HMGP funding in response to major disasters is based on a percentage (in some cases up to 20 percent) of federal funding in response to those disasters.

Building Resilient Infrastructure and Communities. The BRIC program supports state and local governments with grants to help finance flood adaptations. Eligible projects include the construction of community infrastructure such as levees, dams, and shoreline barriers; the preservation or restoration of green infrastructure; purchases of floodplain easements to restrict land use; and the elevation or buyouts of individual buildings. The President is authorized to set aside for the BRIC program up to 6 percent of funding awarded from the Disaster Relief Fund for the relief of major disasters. In 2022, the Infrastructure Investment and Jobs Act appropriated an additional $200 million for each of the following five years. Grants are awarded to state and local governments through a competitive process.

Flood Mitigation Assistance. FMA grants can be used for projects that reduce or eliminate the risk of repetitive flood damage to buildings insured under the NFIP. From 2016 to 2023, the FMA program received up to $175 million per year from the premiums collected for the NFIP.21 In 2022, the Infrastructure Investment and Jobs Act appropriated an additional $700 million for each of the following five years. FEMA chooses which projects to fund; those choices are informed by state and local governments’ prioritization of projects and the projects’ cost-effectiveness.

Community Development Block Grant Mitigation Funds. The Department of Housing and Urban Development’s CDBG-MIT funding was intended to help communities limit risks and reduce future losses from disasters. Lawmakers provided those funds in 2018 and 2019 through supplemental appropriations for specific places that had suffered from certain disasters.

Most of the $16 billion in funds was appropriated in 2018 for grantees recovering from qualifying disasters that had occurred from 2015 to 2018. (About half of the funds were designated for Puerto Rico in the aftermath of Hurricane Maria, which occurred in 2017.) HUD allocated those funds to state and local governments on the basis of the supplemental appropriation legislation, and it awarded and is administering the grants. As part of the grant approval process, state and local governments submitted plans to HUD that (among other things) identified the types of activities for which the funds would be used.

A large share (about a third) of the CDBG-MIT grant recipients’ planned spending, unlike spending by the Army Corps of Engineers and FEMA, was intended to protect local infrastructure (see Figure 8).22 Another third was intended for community-level flood infrastructure, and a quarter was meant for property-level adaptations. The remainder was for management activities, planning, and other assistance.

Cost Sharing and Related Spending by State and Local Governments. State and local governments share in the cost of federal flood adaptation projects. Required cost shares for states and localities are specified in law and typically amount to about a quarter of the costs of such projects. Altogether, the cost-share amounts owed by state and local governments in 2019 totaled approximately $1.5 billion.23

State and local governments also finance their own flood control infrastructure; states have invested tens and sometimes hundreds of millions of dollars in recent projects. Those sums often finance grants to localities, emergency preparedness efforts, property buyout programs, and state infrastructure banks that provide loans for adaptations and reinvest loan repayments in additional adaptations. Examples include Illinois’s allocation of $31 million for flood adaptation projects in a 2019 state infrastructure bill and Virginia’s Community Flood Preparedness Fund, which awards about $50 million per year for flood prevention projects. State and local governments also incur costs on an ongoing basis to maintain certain kinds of adaptations.

Additional efforts by state and local governments can complement federal spending for flood adaptation. For examples, see Box 1.

Assessments of Damage Reductions

The effects of individual adaptation projects can vary widely. Two-thirds of the Army Corps of Engineers’ projects—those with benefit-cost ratios in the middle of the distribution—were expected to reduce flood damage by $2 to $6 (in present value, as calculated by the Corps) for each dollar of spending. The average expected reduction in damage from those projects was $3 for each dollar spent. In CBO’s assessment, FEMA’s adaptation projects reduce future flood damage by roughly $2 per dollar of spending.

Although CBO estimates that spending for adaptation projects will produce the reductions in expected flood damage described above, the agency’s cost estimates for bills that include such spending do not reflect changes in spending for disaster relief or other federal programs. For information about the reasons for that approach, see Box 2.

Factors That Influence Estimates of Reductions in Flood Damage. Flooding can impose different kinds of damage on households, businesses, and governments (see Table 1). Some losses suffered by households and businesses, such as injuries and deaths, are not covered by federal disaster relief programs and may not be included in some assessments of reductions in flood damage.

Many other factors can affect estimates of reductions in future flood damage. One is the discount rate, or rate of interest, that is used to translate future avoided losses into current dollars. (For more details on how discount rates affect the estimated benefits of flood adaptation projects, see the appendix.) Another is the length of the useful life of an adaptation, which affects the period over which reductions in damage are calculated. To the extent that they are taken into consideration, expectations that risks will grow over time increase estimates of the damage that would be avoided through adaptations (although the protection offered by other adaptations may also increase over time). In addition, avoided damage can be measured using either replacement values or market values.

Expected Reductions in Flood Damage From Army Corps of Engineers Adaptation Projects. To estimate reductions in damage stemming from the Corps’ flood control projects, CBO compiled estimates of benefit-cost ratios produced by the Corps for its projects and then excluded the projects with the highest one-sixth and lowest one-sixth of benefit-cost ratios (see Figure 9). CBO chose to examine the projects from the middle of the distribution (23 of 33) to eliminate the influence of projects with extremely large benefit-cost ratios, which reflect outcomes that may be less likely.

Those projects from the middle of the distribution had benefit-cost ratios between 2 and 6—that is, the projects were estimated to prevent $2 to $6 in damage for every dollar spent. The average benefit-cost ratio was 3, which translates to a reduction of $3 in future damage for every dollar spent. Lifetime costs for all of those projects combined totaled $13 billion. Only four of the projects were coastal; the rest addressed riverine flooding. (The small sample size does not allow for differentiating between the ratios for coastal and riverine projects.)

In 2019, the Government Accountability Office (GAO) examined eight of the Corps’ benefit-cost analyses of its flood control projects and determined that the methods underlying those analyses were consistent with best practices.24 All of the analyses, which were published between 2015 and 2017, quantified expected reductions in property damage; half also included emergency costs avoided. Some indirect benefits (such as new recreational amenities or reduced transportation disruptions) were included in only one or two studies and amounted to no more than a small share of the total benefits. All of the analyses compared the estimated economic effect of the proposed flood control actions with that of a range of alternatives, including various structures (such as levees or bridge modifications) as well as nonstructural measures (such as floodplain management activities or acquisitions of land). And all estimated benefits and costs covered a 50-year period—long enough to encompass important economic effects.

The Corps generally prioritizes its funding requests on the basis of results from its benefit-cost analyses, which might influence the extent of the losses avoided. When paring down the list of projects to include in the President’s budget request, the Office of Management and Budget has applied a cutoff ratio of 2.5 (after applying a higher discount rate than the Corps used, which has further reduced the number of qualifying projects; for a discussion of discount rates and recent changes to them, see the appendix). Ultimately, however, lawmakers decide which projects to authorize and fund. Projects with lower benefit-cost ratios are still sometimes built because the Corps can recommend a project for Congressional authorization if there is a significant federal interest in it, regardless of its benefit-cost ratio.

Expected Reductions in Flood Damage From FEMA’s Adaptation Projects. In CBO’s assessment of the research literature, estimates of expected damage reductions from FEMA’s flood adaptation projects approach $2 for every dollar spent. One way to estimate those reductions is to quantify the relationship between FEMA’s spending on adaptations and the costs of damage from natural disasters in subsequent years using regression analysis. One such study of FEMA’s Hazard Mitigation Grant Program and Public Assistance Program used county-level data to examine the relationship between spending by those programs and property damage caused by flooding over the 1992–2015 period.25 That study found that for each dollar spent, damage decreased by $1.80.

Another way to estimate the damage reductions is to quantify the reductions expected from the kinds of adaptation projects that FEMA’s programs typically pay for (see Figure 7). One study estimated how much damage to both inland and coastal properties could be avoided through hypothetical residential elevation and buyout projects. It used detailed projections of flood depths and an engineering-based approach that related flood depth to property damage. That study found that for a set of potential projects that matched FEMA’s historical rate of spending on different types of adaptations from 2008 to 2019, each dollar spent would prevent an average of $2.16 in expected damage.26 Another study examined property-level adaptations that specifically protected against riverine flooding—the category of adaptations that accounts for the largest share of FEMA’s spending. That study found that the expected damage avoided by elevating, floodproofing, or buying out residential properties was about $1.75 per dollar spent.27 Both studies considered only those properties for which the benefits of adaptation were projected to outweigh the costs.

FEMA’s benefit-cost analyses, like those of the Army Corps of Engineers, also provide information about reductions in expected losses attributable to the agency’s flood adaptation projects. However, FEMA’s benefit-cost analyses are less reliable. In some ways, they may underestimate savings. As FEMA officials have acknowledged, applicants for FEMA grants may stop calculating a project’s benefits once its benefit-cost ratio reaches 1.0—the threshold that makes projects eligible for funding. In other ways, the analyses may overestimate reductions in damage. They may include values for losses that are not usually included in other estimates (for instance, injuries or the loss of public transportation services, water, and electricity) and are not covered by federal disaster relief programs. And benefit-cost ratios from projects approved in the past may overstate damage reductions from future Flood Mitigation Assistance and BRIC projects. In 2023, FEMA lowered the benefit-cost ratio threshold to 0.75—amounting to a 75 cent reduction in losses for every dollar spent—for projects that also benefit disadvantaged communities or address climate change.28

CBO analyzed reported benefit-cost ratios for all of FEMA’s adaptation grant programs (including HMGP, FMA, and PDM/BRIC) from 2008 to 2019 (the most recent year for which data for all programs were available). Of 7,868 projects with calculated benefits, those in the middle two-thirds of the distribution reported an average benefit-cost ratio of 2.2, or $2.20 in future benefits for every dollar spent in the present (see Figure 10).29 For those projects, benefit-cost ratios ranged from 1 to 5. More detailed analysis did not reveal clear differences in results among programs or over time.

One review of HMGP, FMA, and PDM adaptation grants determined that for each dollar spent in 2019, expected benefits amounted to $1.70.30 A second study reviewed the reported benefit-cost ratios of projects in the BRIC program.31 In 2020, 22 projects made the final stage of review in the selection process. The middle two-thirds of their benefit-cost ratios ranged from 1 to 5, with an average value of roughly 2.9, amounting to a $2.90 reduction in losses for each dollar spent.

Comparison With a Previous Estimate. A prominent report published in 2019 found a much larger effect of adaptation projects for riverine flooding: a $7 reduction in future expected losses for each dollar spent.32 However, that result was based on a very small sample—only five projects with a combined value of $10 million. By comparison, federal spending on similar projects recognized in that report totaled $12 billion.

A second concern about the report is that it used a discount rate lower than what has typically been used by the federal government. Using lower discount rates generally results in higher estimates of the present value of future benefits. Another concern is that the report included a number of costs that are not usually included in analyses of flood damage or covered by federal disaster relief spending: indirect costs of reductions in economic activity, costs associated with post-traumatic stress disorder suffered by flood victims, administrative costs for insurers, and environmental losses. Those costs can be difficult to assess. Indirect costs of reductions in economic activity may occur, for example, when suppliers lose sales to businesses that suffer interruptions because of flooding. However, measures of such costs may not account for other changes in economic activity that partially offset those indirect losses, such as greater sales to competing businesses.

Challenges in Estimating the Effects of Substantially Greater Spending. The estimates of reductions in flood damage discussed above are based on past spending. Significantly increasing the amount of spending for flood adaptation programs might not reduce flood damage to the same extent. In CBO’s estimation, expected savings tend to be greater for programs that explicitly prioritize projects on the basis of results from benefit-cost analyses (such as the Army Corps of Engineers’ construction program) than for programs that use other criteria. Nevertheless, any program’s spending on adaptations is likely to have diminishing returns after the most advantageous projects have been completed.

For example, one study estimated that spending $800 million on property-level adaptations to riverine flooding for the properties that would benefit the most would reduce damage by $6 to $8 (in present value) per dollar spent.33 If that spending were increased to $50 billion, the adaptations could be applied to all properties nationwide for which the present value of the expected reductions in riverine flooding damage exceeded the costs of the adaptations. But the average damage avoided would fall to about $2 per dollar spent.

A second study focused on a larger pool of cost-effective property-level adaptations that would address either riverine or coastal flooding. The results indicated that spending about $30 billion on elevation, buyouts, or floodproofing for the properties that would benefit the most would reduce damage by an average of $8 (in present value) per dollar spent.34 If that spending were increased to roughly $200 billion, the average damage avoided would fall to about $3 per dollar spent.

Another study found that each dollar of $25 billion spent to acquire and conserve undeveloped land in floodplains would prevent $5 in damage through 2070.35 A larger program of floodplain acquisition and conservation could spend roughly $300 billion cost-effectively, but for a program of that size, each dollar of spending would produce a smaller expected reduction in property damage—amounting to $1 to $2 per dollar spent. For a program that spent more than $300 billion, the reduction in damage from the additional spending would drop below $1 per dollar spent.

Uncertainty About the Cost-Effectiveness of Adaptation Spending. All of those numbers that quantify reductions in damage due to adaption spending are estimates and are therefore subject to uncertainty. Many studies have provided estimates of reductions in flood damage from adaptation projects in specific places, but those results may not generalize to areas with different geographic features or patterns of development.36 Benefit-cost analyses may not reliably predict the actual benefits and costs of a project, and the historical and projected effects of adaptation programs and projects also may not reliably predict future effects. In addition, several considerations suggest that future spending for flood adaptation may cause reductions in losses to be smaller or larger than those described above (see Table 2).

Most notably, although flood adaptations are intended to reduce losses from floods, they can sometimes have unintended, costly effects. That potential is greatest with large-scale community protections such as dams and levees. Flood control structures may encourage development in low-lying or otherwise flood-prone areas (downriver from dams or behind levees, for example). The resulting sense of safety may undermine incentives for local governments and people to take risk-reducing measures.37 If a structure then fails because of construction flaws, insufficient maintenance, or flood levels that exceed those for which it was designed, the damage can be catastrophic. That kind of situation occurred in August 2005 when Hurricane Katrina made landfall near New Orleans. Such residual risks are especially a concern in a changing climate, which can introduce flood risks that adaptations were not designed to handle.

Property-level adaptations may also be affected by unforeseen complications. For instance, effective buyouts and relocations rely not only on approval from the federal government but on participation by local governments and homeowners. Local governments, in addition to covering their share of capital costs, commit to maintaining acquired property—and homeowners need to agree to participate, too. To the extent that buyouts result in a haphazard or “checkerboard” selection of properties, those properties may be costlier to maintain or provide less additional benefit.38 They also may reduce surrounding property values and the local tax base.

The budgetary implications of additional spending for flood adaptation projects further depend on how the spending is financed.39 For instance, financing such projects through reductions in the government’s non­investment purchases, rather than through federal borrowing, would decrease their net budgetary impact.

The Beneficiaries of Reductions in Flood Damage

Losses from flooding affect households, the federal government, businesses, and state and local governments. In CBO’s estimation, given expected flood losses and historical government spending patterns, households would benefit the most from reductions in flood risk, followed by the federal government. Businesses and state and local governments would benefit to a lesser extent. The net effects on private insurers are unclear. Of course, the effects of specific programs and projects on households, governments, and businesses will vary depending on the location and the nature of the adaptations.

Households

In CBO’s assessment, households (which include both homeowners and renters) face the largest share of the costs of damage from floods (see Figure 11). For that reason, they would benefit the most from reductions in flood damage. Households would not only experience less damage to their homes and personal property and less need for temporary housing after floods; they would also lose less income as a result of economic disruptions and would face less risk of death and injury. In some instances, the reductions in losses resulting from adaptations may lead to higher property values, which would benefit current homeowners.40

Communities at risk of flooding tend to have certain characteristics.41 Those characteristics include:

• Coastal locations (which have twice the risk of inland locations and greater projected increases in risk through 2050),
• Lower median household income,
• A majority of dwellings that are secondary residences,
• A smaller share of renters, and
• A greater share of households that include someone 65 or older and, relatedly, a smaller share of households with children.

The way in which adaptation programs are structured and funds for projects are awarded can affect who benefits from those projects. For instance, CDBG-MIT grants are provided within the framework of the CDBG program, which is intended to help people and communities with limited resources. But in other cases, methods used to guide the approval and selection of adaptation projects can hinder their implementation in lower-income communities. Some FEMA programs award grants through a competitive process or require applicants to supply an inventory of damage from disasters, and both of those approaches may pose challenges for communities with constrained resources.42 Additionally, as discussed above, the Army Corps of Engineers and FEMA pursue flood adaptation projects only if their expected benefits exceed their expected costs, which can make projects in communities with low property values less likely to be eligible.

Some projects that would have served economically disadvantaged communities have had difficulty securing funding. For example, an Army Corps of Engineers flood adaptation project for Princeville, North Carolina—where per capita income was $12,024—was authorized in 2016. Because the average value of structures in the town was 41 percent of the national average, the Corps’ benefit-cost analysis was not favorable, which resulted in a lower prioritization of the project. Before the project received funding, the town suffered significant damage from Hurricane Matthew.

The Federal Government

Adaptations that reduce the risk of flooding benefit the federal government in several ways. Improved community infrastructure can reduce damage to federal buildings and federally supported infrastructure such as roads. Reductions in flood damage also reduce the demand for relief spending. In addition, the federal government benefits from fewer claims from property owners participating in the NFIP (that is, until the NFIP transitions to no longer subsidizing policyholders).43 Moreover, reducing flood risk can prevent losses in economic activity that would affect the federal budget.

Lower risk of flooding may also lead to a lower risk of default on federally backed mortgages.44 When homes are damaged by flooding, homeowners with mortgages may change their repayment behavior, resulting in defaults, loan modifications, or early repayment. To the extent that adaptation protected those homes from flood damage, it would reduce the federal costs associated with those mortgages.

Businesses

For business owners, community flood adaptation infrastructure reduces the risk of damage to buildings and equipment and the risk of losses as a result of disruptions to business activity, including the displacement of employees and customers. CBO projects that increases in damage from hurricanes as a result of climate change will cause real (inflation-adjusted) gross domestic product in 2050 to be 0.2 percent lower than it would be if climate conditions at the start of the century prevailed.45

State and Local Governments

State and local governments benefit in several ways from adaptations that reduce the risk of flooding. Key benefits include reduced damage to transportation and utility infrastructure and higher tax revenues when property values rise because of the reduced risk. (In 2021, 15 percent of state and local governments’ general revenues came from property taxes.)46

State and local governments may even benefit from lower borrowing costs if adaptations protect against future losses of state and local fiscal resources. After a hurricane strikes, local governments experience declines in revenues that are initially offset by intergovernmental transfers but later grow significantly. Local revenue sources (including taxes and fees) have been found to decline by an average of about 2 percent from 6 to 10 years after a hurricane—and by as much as 7 percent over that period after major hurricanes. The risk of lower future revenues can raise state and local governments’ borrowing costs. Studies have found evidence for an increase of 5 to 23 basis points in borrowing costs associated with a moderate increase in the risk of flooding.47 Because flood adaptations reduce the risk of damage, they may reduce those costs. One study found that over a period of 20 years, county governments that had invested in flood adaptations saw their average borrowing costs decrease by 10 to 26 basis points per year.48

Of course, state and local governments also have to pay for their share of the capital costs of adaptation projects. (Those costs are not included in Figure 11.)

Private Insurers

The net effect of reductions in flood risk on private insurers is unclear. (Because insurers do not expect to provide flood insurance at a loss, they are not included among the bearers of expected flood damage in Figure 11.) Private insurers play several roles in the market for flood insurance, and the impact of risk reduction may vary over time as policy premiums and purchases of insurance adjust to reflect changes in property prices and expected risk.

Privately Written Policies. Private insurers are the primary source for commercial flood insurance policies; they account for a small (but growing) share of the residential flood insurance market. In calendar year 2022, private commercial flood insurance premiums amounted to nearly $900 million, and private residential premiums amounted to about $400 million.49 By comparison, in fiscal year 2022, premiums for the NFIP’s flood insurance policies—most of which were for residential coverage—totaled about $3 billion.50 The most common forms of private flood insurance policies have higher limits than the NFIP’s $250,000 limit for residential properties and $500,000 limit for commercial properties. Other policies that have lower limits are sold in lower-risk areas as modifications to existing homeowner’s insurance policies.

In the short term, reductions in flood damage benefit private insurers by decreasing claims on flood insurance policies. Over time, premiums may be adjusted to reflect the reduction in risk, and the lower risk may dampen demand for extra coverage, which could reduce insurers’ profits.

Involvement With the NFIP. Private insurers can issue and service NFIP policies through the Write-Your-Own Program or sell NFIP policies directly to purchasers on behalf of FEMA for a commission. (In either case, the NFIP retains the financial risk of paying claims for the policy, and the policy terms and premiums are the same.) It is unclear how a reduction in the risk of flood damage would affect those insurers. In 2022, the NFIP paid private insurers a combined $900 million for administrative and operating costs and for commissions.51 Lower insurance premiums could boost purchases of insurance through the NFIP, whereas lower risk could reduce the take-up of flood insurance.

In addition to providing flood insurance to consumers, the private sector provides reinsurance (that is, insurance coverage for insurers) for the NFIP. Over the short term, reinsurance companies, like companies that provide insurance directly to homeowners and businesses, would benefit from reductions in flood risk. It is hard to tell what effect lower risk would have on the profitability of private-sector reinsurers over the longer term as premium rates and reinsurance purchases changed.

FEMA’s recent experiences with reinsurance illustrate how perceptions of risk and purchases of reinsurance can evolve (see Figure 12). In 2017, FEMA purchased reinsurance coverage worth $1 billion for a premium of $150 million. The policy for that year covered 26 percent of losses between $4 billion and $8 billion arising from a single flooding event, excluding the $4 billion in losses under the threshold for the claim. When Hurricane Harvey inflicted damage resulting in more than $8 billion in claims—making it the second-costliest hurricane in U.S. history—FEMA claimed the full $1 billion from its reinsurers. After that larger-than-expected loss, FEMA increased its reinsurance purchases. From 2018 to 2023, FEMA paid reinsurers a total of $2.1 billion, but conditions were not met for any further reinsurance claims.52 After a run of years without any catastrophic claims on the NFIP, FEMA has reduced its loss coverage and the premiums it pays.

---

1. 1. Congressional Budget Office, Communities at Risk of Flooding (September 2023), www.cbo.gov/publication/58953.

2. 2. For discussions of take-up rates for flood insurance policies among different groups, see Diane P. Horn and Baird Webel, Introduction to the National Flood Insurance Program (NFIP), Report R44593, version 67 (Congressional Research Service, April 2, 2024), https://tinyurl.com/bddzn7y2; and David D. Evans, Leighton A. Hunley, and Brandon Katz, Unpriced Costs of Flooding: An Emerging Risk for Homeowners and Lenders (Milliman, January 2022), https://tinyurl.com/azza2e2e.

3. 3. Other reasons why people may underestimate flood risk include optimism and inertia. See Carolyn Kousky and others, “Flood Risk and the U.S. Housing Market,” Journal of Housing Research, vol. 29, no. S1 (2020), pp. S3–S24, https://doi.org/10.1080/10527001.2020.1836915.

4. 4. Congressional Budget Office, Potential Increases in Hurricane Damage in the United States: Implications for the Federal Budget (June 2016), www.cbo.gov/publication/51518.

5. 5. Insurance Information Institute, “Natural Catastrophe Losses in the United States” (various years), www.iii.org/table-archive/21420; Oliver E. J. Wing and others, “Inequitable Patterns of U.S. Flood Risk in the Anthropocene,” Nature Climate Change, vol. 12 (February 2022), pp. 156–162, www.nature.com/articles/s41558-021-01265-6; First Street Foundation, The 4th National Risk Assessment: Climbing Commercial Closures (December 2021), https://tinyurl.com/4bxxezuz; and First Street Foundation, The Cost of Climate: America’s Growing Flood Risk (February 2021), https://tinyurl.com/2yzty62h.

6. 6. Expected damage accounts for all of the paths that a hurricane of a given category could follow—for instance, whether it heads harmlessly out to sea or makes landfall at different points along the coast, including major cities. Expected damage also accounts for more common storms and flooding.

7. 7. Congressional Budget Office, Flood Damage and Federally Backed Mortgages in a Changing Climate (November 2023), www.cbo.gov/publication/59379; and Oliver E. J. Wing and others, “Inequitable Patterns of U.S. Flood Risk in the Anthropocene,” Nature Climate Change, vol. 12 (February 2022), pp. 156–162, www.nature.com/articles/s41558-021-01265-6.

8. 8. William V. Sweet and others, Global and Regional Sea Level Rise Scenarios for the United States: Updated Mean Projections and Extreme Water Level Probabilities Along U.S. Coastlines, NOAA Technical Report NOS 01 (National Oceanic and Atmospheric Administration, February 2022), https://tinyurl.com/zp8bh579.

9. 9. Congressional Budget Office, Potential Increases in Hurricane Damage in the United States: Implications for the Federal Budget (June 2016), www.cbo.gov/publication/51518. See also Oliver E. J. Wing and others, “Inequitable Patterns of U.S. Flood Risk in the Anthropocene,” Nature Climate Change, vol. 12 (February 2022), pp. 156–162, www.nature.com/articles/s41558-021-01265-6.

10. 10. Analytical Perspectives: Budget of the United States Government, Fiscal Year 2023 (March 2022), pp. 279–280, www.govinfo.gov/app/details/BUDGET-2023-PER.

11. 11. See, for example, and Evelyn G. Shu and others, “Integrating Climate Change Induced Flood Risk Into Future Population Projections,” Nature Communications, vol. 14 (December 2023), article 7870, https://doi.org/10.1038/s41467-023-43493-8; and Augustín Indaco and Francesc Ortega, Adapting to Climate Risk? Local Population Dynamics in the United States, IZA Discussion Paper No. 15982 (IZA Institute of Labor Economics, March 2023), https://doi.org/10.2139/ssrn.4377784.

12. 12. See, for example, Daryl Fairweather and others, “The Impact of Climate Risk Disclosure on Housing Search and Buying Dynamics: Evidence From a Nationwide Field Experiment With Redfin” (paper presented at the National Bureau of Economic Research Summer Institute 2023 Environmental and Energy Economics Conference, Cambridge, Mass., July 24–25, 2023), https://tinyurl.com/5b5fn8u7; Jesse D. Gourevitch and others, “Unpriced Climate Risk and the Potential Consequences of Overvaluation in U.S. Housing Markets,” Nature Climate Change, vol. 13, no. 3 (March 2023), pp. 250–257, www.nature.com/articles/s41558-023-01594-8; and Miyuki Hino and Marshall Burke, “The Effect of Information About Climate Risk on Property Values,” Proceedings of the National Academy of Sciences of the United States of America, vol. 118, no. 17 (April 2021), https://doi.org/10.1073/pnas.2003374118.

13. 13. Lint Barrage and Jacob Furst, “Housing Investment, Sea Level Rise, and Climate Change Beliefs,” Economics Letters, vol. 177 (April 2019), pp. 105–108, https://doi.org/10.1016/j.econlet.2019.01.023.

14. 14. For more discussion of historical patterns of spending from those programs, see Congressional Budget Office, Army Corps of Engineers: Budgetary History and Projections (November 2022), www.cbo.gov/publication/58415, and FEMA’s Disaster Relief Fund: Budgetary History and Projections (November 2022), www.cbo.gov/publication/58420.

15. 15. A present value expresses the flows of current and future benefits or costs in terms of a single lump sum received or paid today. For details about how those values are calculated, see the appendix.

16. 16. Congressional Budget Office, Communities at Risk of Flooding (September 2023), www.cbo.gov/publication/58953.

17. 17. Some federal programs differentiate between buyouts and acquisitions. In buyouts (which are more common), the purchased property is demolished and devoted to open space to prevent any future flood damage. In acquisitions, properties may be used for other purposes, such as in ways that promote economic development.

18. 18. For more discussion of those and other programs to prevent or reduce flood damage, see Nicole T. Carter and others, Flooding: Selected Federal Assistance and Programs to Reduce Risk, Report R47286, version 2 (Congressional Research Service, October 18, 2022), https://tinyurl.com/mpb3e2mm.

19. 19. For further discussion of those programs, see Diane P. Horn, Recent Funding Increases for FEMA Hazard Mitigation Assistance, Report IN11733, version 11 (Congressional Research Service, December 22, 2022), https://tinyurl.com/yc887a2f.

20. 20. The most recent data including all three programs are from 2019 because FEMA grants can take a few years to award from the time that appropriations are made.

21. 21. Diane P. Horn and Baird Webel, Introduction to the National Flood Insurance Program (NFIP), Report R44593, version 67 (Congressional Research Service, April 2, 2024), https://tinyurl.com/bddzn7y2.

22. 22. As of September 2024, because of the time involved in the allocation of funds, the formulation and review of the plans, and the establishment and implementation of the programs and projects proposed in those plans, about $1 billion in grants had been spent by state and local government grant recipients.

23. 23. Amounts derived by applying cost-sharing ratios to spending amounts for each program are not strictly additive; for instance, CDBG-MIT grants can be used to meet the cost-sharing requirements for other federal flood adaptation programs. State and local governments may also contribute more than the amount required. For more details, see Nicole T. Carter and others, Flooding: Selected Federal Assistance and Programs to Reduce Risk, Report R47286, version 2 (Congressional Research Service, October 18, 2022), https://tinyurl.com/mpb3e2mm.

24. 24. Government Accountability Office, Army Corps of Engineers: Evaluations of Flood Risk Management Projects Could Benefit From Increased Transparency, GAO-20-43 (November 2019), www.gao.gov/products/gao-20-43. Those findings provide a more favorable update to a series of studies by GAO and others in the early 2000s that found that the Corps was overestimating the benefits of water resource projects.

25. 25. Meri Davlasheridze and Qing Miao, “Does Postdisaster Aid Promote Community Resilience? Evidence From Federal Disaster Programs,” Natural Hazards, vol. 109, no. 1, pp. 63–88 (October 2021), https://doi.org/10.1007/s11069-021-04826-2.

26. 26. Evan Herrnstadt and Jared Jageler, Flood Damage Avoided by Potential Spending on Property-Level Adaptations, Working Paper 2024-03 (Congressional Budget Office, May 2024), www.cbo.gov/publication/58168.

27. 27. Cameron Wobus and others, “Climate Change, Riverine Flood Risk, and Adaptation for the Conterminous United States,” Environmental Research Letters, vol. 16, no. 9 (September 2021), article 094034, https://doi.org/10.1088/1748-9326/ac1bd7.

28. 28. Federal Emergency Management Agency, “NFIP Modifies Benefit-Cost Ratio for Community Grant Programs” (updated March 6, 2023), https://tinyurl.com/yc5ut2js.

29. 29. Those benefit-cost ratios were calculated with a higher discount rate than the ratios reported by the Army Corps of Engineers. (For a discussion of the Corps’ discount rates, see the appendix.) Using an average of the Army Corps’ discount rates and applying a simplified calculation assuming that benefits were spread equally over 30 years and project costs were incurred in the first year would result in an average benefit-cost ratio of about 3.1. Detailed estimates of the timing of benefits and costs are unavailable.

30. 30. Government Accountability Office, Disaster Resilience: FEMA Should Take Additional Steps to Streamline Hazard Mitigation Grants and Assess Program Effects, GAO-21-140 (February 2021), www.gao.gov/products/gao-21-140.

31. 31. Benjamin M. Miller and others, The Cost of Cost-Effectiveness: Expanding Equity in Federal Emergency Management Agency Hazard Mitigation Assistance Grants (RAND Corporation, 2023), www.rand.org/pubs/research_reports/RRA2171-1.html.

32. 32. National Institute of Building Sciences, Multi-Hazard Mitigation Council, Natural Hazard Mitigation Saves: 2019 Report (December 2019), https://tinyurl.com/tpxj7da3.

33. 33. The result depends on the specific climate and emissions scenario. See Cameron Wobus and others, “Climate Change, Riverine Flood Risk, and Adaptation for the Conterminous United States,” Environmental Research Letters, vol. 16, no. 9 (September 2021), article 094034, https://tinyurl.com/264a2bum.

34. 34. Evan Herrnstadt and Jared Jageler, Flood Damage Avoided by Potential Spending on Property-Level Adaptations, Working Paper 2024-03 (Congressional Budget Office, May 2024), www.cbo.gov/publication/58168.

35. 35. The ranges depend on whether properties are acquired in the 5-year or 20-year floodplain. See Kris A. Johnson and others, “A Benefit-Cost Analysis of Floodplain Land Acquisition for U.S. Flood Damage Reduction,” Nature Sustainability, vol. 3, no. 1 (January 2020), pp. 56–62, https://doi.org/10.1038/s41893-019-0437-5.

36. 36. For example, for a study examining adaptation projects in the Houston-Galveston area, see Meri Davlasheridze and others, “Economic Impacts of Storm Surge and the Cost-Benefit Analysis of a Coastal Spine as the Surge Mitigation Strategy in Houston-Galveston Area in the USA,” Mitigation and Adaptation Strategies for Global Change, vol. 24 (2019), pp. 329–354, https://doi.org/10.1007/s11027-018-9814-z; for a study examining such projects in New York City, see Jeroen C. J. H. Aerts and others, “Evaluating Flood Resilience Strategies for Coastal Megacities,” Science, vol. 344, no. 6183 (May 2014), pp. 473–475, https://doi.org/10.1126/science.1248222.

37. 37. See, for example, Nicole S. Hutton, G. A. Tobin, and B. E. Montz, “The Levee Effect Revisited: Processes and Policies Enabling Development in Yuba County, California,” Journal of Flood Risk Management, vol. 12 no. 3 (2019), article e12469, https://doi.org/10.1111/jfr3.12469; and Raymond J. Burby, “Hurricane Katrina and the Paradoxes of Government Disaster Policy: Bringing About Wise Governmental Decisions for Hazardous Areas,” Annals of the American Academy of Political and Social Science, vol. 604 (March 2006), pp. 171–191, www.jstor.org/stable/25097787.

38. 38. Kayode O. Atoba and others, “Strategic Property Buyouts to Enhance Flood Resilience: A Multi-Criteria Spatial Approach for Incorporating Ecological Values Into the Selection Process,” Environmental Hazards, vol. 20, no. 3 (2021), pp. 229–247, https://doi.org/10.1080/17477891.2020.1771251.

39. 39. Congressional Budget Office, Effects of Physical Infrastructure Spending on the Economy and the Budget Under Two Illustrative Scenarios (August 2021), www.cbo.gov/publication/57327.

40. 40. Several studies have reported increases in property values associated with specific kinds of flood adaptations in specific places; see, for example, David L. Kelly and Renato Molina, “Adaptation Infrastructure and Its Effects on Property Values in the Face of Climate Risk,” Journal of the Association of Environmental and Resource Economists, vol. 10, no. 6 (November 2023), pp. 1405–1438, https://doi.org/10.1086/725109; Jacob T. Bradt and Joseph E. Aldy, “Private Benefits From Public Investment in Climate Adaptation and Resilience” (paper presented at the National Bureau of Economic Research Summer Institute 2023 Environmental and Energy Economics Conference, Cambridge, Mass., July 24–25, 2023), https://tinyurl.com/5b5fn8u7; and Steven J. Dundas and David J. Lewis, “Estimating Option Values and Spillover Damages for Coastal Protection: Evidence From Oregon’s Planning Goal 18,” Journal of the Association of Environmental and Resource Economists, vol. 7, no. 3 (May 2020), pp. 519–554, https://doi.org/10.1086/708092. However, not all projects have been linked to gains in property values. See, for example, Arlan Brucal and John Lynham, “Coastal Armoring and Sinking Property Values: The Case of Seawalls in California,” Environmental Economics and Policy Studies, vol. 23 (2021), pp. 55–77, https://doi.org/10.1007/s10018-020-00278-3.

41. 41. For further discussion, see Congressional Budget Office, Communities at Risk of Flooding (September 2023), www.cbo.gov/publication/58953. The analysis underlying that report was based on household characteristics at the level of the census block group—the smallest geographic unit for which such data are available, consisting of 240 to 1,200 households.

42. 42. Benjamin M. Miller and others, The Cost of Cost-Effectiveness: Expanding Equity in Federal Emergency Management Agency Hazard Mitigation Assistance Grants (RAND Corporation, Homeland Security Operational Analysis Center, 2023), www.rand.org/pubs/research_reports/RRA2171-1.html.

43. 43. For a discussion of the time frames over which NFIP subsidies are expected to phase out and the factors that affect those time frames, see Diane P. Horn and Baird Webel, Introduction to the National Flood Insurance Program (NFIP), Report R44593, version 67 (Congressional Research Service, April 2, 2024), https://tinyurl.com/bddzn7y2.

44. 44. Carolyn Kousky, Mark Palim, and Ying Pan, “Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey,” Journal of Housing Research, vol. 29, Supplement 1 (November 2020), pp. S86–S120, https://doi.org/10.1080/10527001.2020.1840131.

45. 45. Congressional Budget Office, “Technical Information About How CBO Models the Effects of Climate Change on Output in Its Long-Term Economic Projections” (September 2021), www.cbo.gov/publication/57421.

46. 46. Russell Pustejovsky and Jeffrey Little, Annual State and Local Government Finances Summary: 2021 (Census Bureau, August 2023), https://tinyurl.com/2k395xhn.

47. 47. Rhiannon Jerch, Matthew E. Kahn, and Gary C. Lin, “Local Public Finance Dynamics and Hurricane Shocks,” Journal of Urban Economics, vol. 134 (March 2023), article 103516, https://doi.org/10.1016/j.jue.2022.103516; Paul Goldsmith-Pinkham and others, “Sea-Level Rise Exposure and Municipal Bond Yield,” The Review of Financial Studies, vol. 36, no. 11 (November 2023), pp. 4588–4635, https://doi.org/10.1093/rfs/hhad041; and Marcus Painter, “An Inconvenient Cost: The Effects of Climate Change on Municipal Bonds,” Journal of Financial Economics, vol. 135, no. 2 (February 2020), pp. 468–482, https://doi.org/10.1016/j.jfineco.2019.06.006.

48. 48. Yulei Shelley He, “Adaptation Investments, Property Damage, and Debt Financing of Local Governments,” in Essays on Environmental and Financial Economics (Ph.D. dissertation, Department of Economics, University of California, Berkeley, 2022), https://escholarship.org/uc/item/2z15q5z7.

49. 49. AM Best, “Best’s Market Segment Report: U.S. Private Flood Market Growing, Especially Commercial Property” (August 28, 2023), https://tinyurl.com/4t6bbbs6; Insurance Information Institute, Flood: State of the Risk (August 16, 2023), www.iii.org/article/flood-state-of-the-risk.

50. 50. Federal Emergency Management Agency, Federal Insurance and Mitigation Administration, The Watermark, Fiscal Year 2022, Fourth Quarter, vol. 20 (2022), https://tinyurl.com/yxz43u3c.

51. 51. Ibid.

52. 52. Federal Emergency Management Agency, “National Flood Insurance Program’s Reinsurance Program” (updated September 19, 2024), www.fema.gov/flood-insurance/work-with-nfip/reinsurance.

Appendix: Estimating the Present Value of the Expected Benefits and Costs of Flood Adaptation Projects

The benefits of a flood adaptation project are realized over many years. A common method for weighing the benefits and costs of such projects is to convert them into a present value. That present value expresses current and future benefits and costs in terms of an equivalent lump sum received or paid today. The interest rate used to translate future values into current dollars is known as the discount rate.

The choice of a discount rate can significantly affect estimates of the benefits of flood adaptation projects. The lower the discount rate, the higher the present value of the benefits of reductions in flood risk—and the larger the pool of projects that can be economically justified. The present values discussed in this report were calculated for each project by the relevant agency with the discount rate it was using at the time of analysis.1

Differences in Discounting Practices Among Federal Agencies

The Army Corps of Engineers and the Federal Emergency Management Agency (FEMA) use different discount rates when performing benefit-cost analyses to evaluate potential projects (see Figure A-1). The Corps uses a rate that changes from year to year as specified in law. FEMA, by contrast, uses a fixed rate designated by the Office of Management and Budget (OMB).

The Army Corps of Engineers

To estimate the present value of the benefits of its flood adaptation projects, the Corps uses a discount rate designated for water resource projects (that is, projects involving the conservation and development of water and related resources), as specified by the Water Resources Development Act of 1974 (Public Law 93-251). That rate, which is recalculated each year, is based on the average yield on Treasury securities with 15 years or more remaining to maturity (without adjusting for inflation), rounded to the nearest one-eighth of one percent. The change in the discount rate each year is also capped at a quarter of a percent. The discount rate is applied to benefits and costs that have been adjusted for inflation.

The Corps calculated benefit-cost ratios for its flood control and storm damage reduction projects (see Figure 9) using the applicable rate at the time each study was completed or updated. For the projects included in Figure 9, the average discount rate was 3.9 percent.

Whereas the Corps uses the water-resource-projects discount rate to prioritize its projects, OMB uses a different discount rate, one for analyses of public investments, when deciding which projects to include in the President’s budget. Projects with a benefit-cost ratio of less than 2.5 are typically left out of the budget request for the Corps.2

The Federal Emergency Management Agency

FEMA is required to ensure that its flood adaptation projects are cost-effective. To be considered cost-effective, those projects usually must have a benefit-cost ratio that is greater than or equal to 1, based on an analysis that follows FEMA’s and OMB’s guidance. From October 1992 to November 2023, that guidance included OMB’s 7.0 percent discount rate for benefit-cost analyses. Newly revised guidance published in OMB Circular A-94 prescribes a 3.1 percent rate and provides for updates every three years.3

The benefit-cost ratio for a proposed project is treated as a threshold rate by FEMA: Once a project is deemed eligible under that criterion, the benefit-cost ratio usually plays no further role in its selection.

Illustrative Examples of the Present Value of Benefits Estimated With Different Discount Rates

To illustrate how different discount rates can influence estimates of the present value of a project’s future benefits, the Congressional Budget Office considered a hypothetical flood adaptation project (see Table A-1). The project in this example has an up-front construction cost of $100 million. It will be completed in a year, and in each of the next 30 years, expected damage from flooding will be $10 million less than it would be otherwise. To calculate the present value of those benefits, CBO used discount rates of 3 percent (rounded from OMB’s new discount rate), 4 percent (roughly the average of the Army Corps of Engineers’ discount rates for water resource projects from 2000 to 2023), and 7 percent (OMB’s former discount rate).

The project’s cumulative benefits over the 30-year period, without any discounting, amount to $300 million. When discounted, those benefits range from $118 million (with a discount rate of 7 percent) to $194 million (with a discount rate of 3 percent), and the corresponding benefit-cost ratios range from 1.2 to 1.9. Over a 50-year period—comparable to the anticipated lifetime of flood adaptation projects considered by the Corps—those benefit-cost ratios would range from 1.3 to 2.5.

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1. 1. Most of the available benefit-cost analysis documents did not report annual values for benefits and costs, which would have allowed for the application of alternative discount rates in this report.

2. 2. Nicole T. Carter and Adam C. Nesbitt, Discount Rates in the Economic Evaluation of U.S. Army Corps of Engineers Projects, Report R44594, version 4 (Congressional Research Service, August 15, 2016), https://tinyurl.com/ckmcs6nd. Requirements that the benefits of a federal project should exceed its costs date back to the Flood Control Act of 1936.

3. 3. Office of Management and Budget, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs, Circular A-94 (revised November 9, 2023), https://tinyurl.com/yckdepyx.

About This Document

This report was prepared to enhance the transparency of the work of the Congressional Budget Office in analyzing legislative proposals to address climate change. In keeping with CBO’s mandate to provide objective, impartial analysis, the report makes no recommendations.

Justin Humphrey, Jared Jageler, and Chad Shirley prepared the report with guidance from Chad Chirico and Joseph Kile. Christine Browne, Michael Falkenheim, Ann E. Futrell, Evan Herrnstadt, Caroline Nielsen, Sam Papenfuss, Jon Sperl, Emily Stern, Aurora Swanson, and Natalie Tawil (formerly of CBO) offered comments. Caroline Nielsen fact-checked the report.

Meri Davlasheridze of Texas A&M University, Vondalee Hunt of the Government Accountability Office, and Jeremy Martinich of the Environmental Protection Agency commented on an earlier draft. The assistance of external reviewers implies no responsibility for the final product; that responsibility rests solely with CBO.

Mark Doms, Jeffrey Kling, and Robert Sunshine reviewed the report. Christine Browne edited it, and R. L. Rebach created the graphics, prepared the text for publication, and illustrated the cover. The report is available at www.cbo.gov/publication/59971.

CBO seeks feedback to make its work as useful as possible. Please send comments to communications@cbo.gov.

Phillip L. Swagel

Director

September 2024