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