Adapting to climate change - an individual or group pursuit?

Wednesday, 2 October 2024

Jonathan Boston is Emeritus Professor of Public Policy, Victoria University of Wellington

OPINION: Staring down the barrel of climate change, New Zealand’s lawmakers must find a way for the country to adapt effectively to the new reality. This includes ensuring that people are not building homes that are likely to slip down hillsides or be inundated with water.

This week, parliament’s Finance and Expenditure Committee released a report endorsing, across party lines, objectives and principles to guide a new adaptation framework. Mostly, these are unobjectionable. For instance, the report recommends minimising the expected long-term costs of climate change and implementing predictable, principled, and fair funding arrangements. How could anyone disagree?

But serious problems are evident. Some proposed principles, like ‘fairness’, are ill-defined and open to radically different interpretations. Important considerations, such as keeping people physically safe and restoring damaged ecosystems, are missing.

Equally, the report provides little guidance on prioritising the various competing principles or how they should be applied.

Crucially, the question of who should pay for what remains unanswered. This is partly because two rival ethical frameworks underpin the report. One is solidaristic, communitarian, and egalitarian; the other is individualistic, market-oriented, and laissez-faire.

The first approach involves collectively sharing the rising costs of climate-related impacts, such as more extreme flooding and coastal inundation. It is underpinned by a strong planning framework to prevent further development in at-risk areas and precautionary, publicly-supported relocations of vulnerable communities.

The second approach, by contrast, depends on better information, plus market-oriented signals and incentives, to mitigate climate-related risks. Individual responsibility, buyer beware, and risk-based property insurance underpin this approach.

Plainly, the two frameworks are at odds. Depending on which prevails, the societal consequences will differ.

Currently, New Zealand has a relatively solidaristic, “all for one and one for all” approach to managing most natural hazards. Residential property owners pay a compulsory levy on their insurance premiums to the Natural Hazards Commission (formerly EQC). After an earthquake, for example, the Commission covers the first $300,000 of damage to a residential property. These arrangements enhance the availability and affordability of residential property insurance.

But important climate-related risks, like flooding, are excluded from the commission’s coverage. Therefore, properties in higher risk locations are already facing much larger insurance premiums. As climate-risks increase, insurance retreat - insurers refusing to take on risk - will expand. In short, many homeowners will be confronted with insurance unaffordability and unavailability.

Under an individualistic, market-oriented approach, such outcomes are part of the solution. Better risk-related information and risk-related insurance premiums will drive changes in property prices. Development in flood-prone locations will be discouraged. And those already living in risky areas will be incentivised to move to safer locations – assuming they have the means.

But there are many objections to such an approach. People are notoriously poor at assessing risks, especially long-term and unfamiliar risks. Market adjustments to changing risk profiles are often abrupt, contributing to large, unexpected losses. Lower-income households will be disproportionately affected by higher insurance premiums, raising serious issues of social equity. Moreover, declining insurance cover will reduce societal resilience, meaning less capacity to bounce back following a natural disaster. This obviously poses economic and fiscal risks.

Aside from this, imagine losing your equity in a home yet still having a substantial mortgage: how will you move to a safer location? And how will whole communities and suburbs be expected to relocate in the face of sea level rise if there is minimal governmental support?

A more solidaristic adaptation approach, as in France, can reduce such perils. While imperfect, the French model warrants exploration. It has three key goals – national solidarity, prevention and partnership – and several interconnected policy instruments.

First, there is publicly managed insurance scheme known as Catastrophes Naturelles (CatNat), overseen by a state-owned reinsurance company. Unlike our Natural Hazards Commission, the scheme covers all property types, not only residential properties. Also, unlike our scheme, CatNat covers flooding and inundation, and is funded via an uncapped, standardised (i.e. fixed percentage) surcharge on private insurance premiums, regardless of the natural hazard risk. The rate is currently 12% of an overall premium, but will soon rise to 20%.

Under this model, higher-risk properties are cross-subsidised. As a result, insurance cover is almost universally available and relatively affordable. Hence, despite the voluntary nature of property insurance in France, the penetration rate is extremely high (estimated at 98%), thereby enhancing societal resilience to rising climate-related risks.

The second component is robust land-use planning and rigorous building standards. This has to be part of the picture, because cross-subsidising high-risk properties can entrench risky decision making around where people live. Part of the French solution is incentivising local authorities to mitigate such risks by imposing higher CatNat surcharges on insurance premiums in communes with weak adaptation plans.

The final component is public funding for adaptation, including relocation, via the so-called Barnier Fund. The Fund is supported by a 12% levy applied to the premium surcharge on property insurance. Local authorities, among others, can access the Fund for investments in flood prevention and protection, raising risk awareness, and purchasing at-risk properties.

New Zealand faces unprecedented climate-related risks over coming decades. A well-designed community-minded response will likely be superior to a largely market-oriented approach for enabling proactive adaptation, promoting resilience, minimising long-term societal costs, reducing fiscal risks, and protecting our least advantaged citizens.

Admittedly, it would require major policy changes. But it deserves serious consideration.