2 Economic Resilience
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Physical impacts of climate change—from rising sea levels to more frequent and severe wildfires and floods—have economic costs that are only expected to increase over time. While the full range of costs may not be accurately captured in GDP, rising costs can affect Canada’s long-term prosperity. Achieving clean growth therefore depends on being able to avoid or reduce those costs by improving resilience and adapting to a changing climate. Governments’ policy choices can affect the scale and pace of resilience and adaptation efforts. Tracking and understanding the impacts and costs of a changing climate can inform those policy choices and help public and private sectors prepare and invest in effective adaptive measures.1
Headline Indicator 2: Frequency and Cost of Climate-related Natural Disasters
Ideally, Canada would track the costs of various impacts associated with a changing climate, including acute weather events and slow-onset changes. For clean growth, we want to limit cost increases over time. At a national level, the Canadian Disaster Database—managed by Public Safety Canada—provides a useful proxy for acute weather events. It tracks the annual frequency and estimated cost of natural disasters over time (Figure 2.1).
The level of public spending on natural disasters has increased over time, raising concerns globally about the fiscal capacity of governments to manage the impacts of a changing climate. If costs continue to rise, governments will face pressure to cut spending in other areas or raise taxes.
In Canada, the federal government provides post-disaster financing to provincial governments through Disaster Financial Assistance Arrangements (DFAA). This funding mechanism grew from an annual average of $10 million in 1970–1995 to $360 million in 2011–2016 (in current dollars) (PSC, 2017). In the 2018–19 fiscal year, there was a $492 million increase in DFAA accrued liabilities (PSC, 2019). Flooding accounts for about three-quarters of disaster relief funding. Reimbursements under the Emergency Management Assistance Program for Indigenous communities have also increased since 2005, with over $150 million provided in 2018–19 (ISC, 2019).
Many provincial and municipal governments have also faced higher costs from disasters; the magnitude of these costs varies with the type and severity of natural disasters and the types of funding programs available (Henstra & Thistlethwaite, 2017). For example, provinces offer different levels of compensation to homeowners following natural disasters (Bryan-Baynes, 2019). Municipalities face costs from repairing or rebuilding municipal infrastructure or paying for additional hours of work from city staff and contractors. For example, the Quebec government had spent $211 million in compensation for half of the victims of the spring 2019 floods, as of the end of 2019, implying that spending could reach twice that amount (Maratta, 2019). The City of Montreal faced costs from damages and emergency services totalling $17 million (Oduro, 2020).
Insured losses provide a good indicator of private costs from catastrophic weather events. As illustrated in Figure 2.2, insured losses have trended upwards over the past few decades, in large part due to flooding and wildfire. Residential insurance for overland flooding became available from some providers in 2015, but many at-risk residences in Canada are not covered (OECD, 2019). In 2013, floods in southern Alberta caused about $6 billion in losses, but only about $1.7 billion was insured (Meckbach, 2018).
These trends will be increasingly important to monitor as extreme climate events become more frequent and severe. Insurers facing increasingly large payouts may have to either refuse to insure at-risk areas or increase rates to unaffordable levels (Stone, 2020). Various options have been discussed between insurance companies and governments to shift to a new approach to managing high-risk properties (IBC, 2019).
Assessing future climate risks can help inform policy in ways that ultimately reduce the costs and damages from future events. That is, a better understanding of future risks can help communities prevent damages from occurring in the first place and help them recover faster and stronger afterwards, particularly in remote Indigenous and non-Indigenous communities that are already challenged with limited resources and support.
Many municipalities are making progress in this area. For example, a 2018 study by the U.S.-based organization CDP collected data from 620 cities around the world on the climate hazards they are facing, including several Canadian cities (see Figure 2.3). These Canadian municipalities identified several hazards as “extremely serious,” including flooding, storm surges, wildfires, and droughts. “Serious” hazards include heat waves, storms, freeze-thaw cycles, pests, and vector-borne disease (CDP, 2018). However, the data are partial and incomplete. Many municipalities are underreporting their risk, which is likely because they have not completed comprehensive assessments (Tigue, 2019). The fact that Edmonton and Calgary report more climate hazards than other cities is more indicative of greater effort expended on risk assessment than higher risk.
While natural disaster costs are indicative of the growing economic impact of climate change, the indicator has clear limitations as a metric of progress towards a more resilient economy:
- Natural disaster costs alone underestimate the true costs of climate change. Climate change impacts extend far beyond extreme events. As a result, the costs of natural disasters will significantly understate the costs of climate change. Cascading, long-term, and slow-onset climate impacts may cost far more than single events. A comprehensive understanding of climate change costs requires tracking a variety of impacts, such as lost agricultural productivity, lost worker productivity in warmer temperatures, damage to northern buildings from permafrost thaw, expansion of the range of insects in forestry, and growing health effects from heat waves and Lyme disease.
- Natural disasters are influenced by multiple factors. Some natural disasters can, at least in part, be attributed to climate change (Box 2.1). Climate change is increasing the probability, frequency, and intensity of extreme events, with different impacts across the country (ECCC, 2019). However, other factors are relevant in shaping disaster losses as well. Flood and fire costs, for example, are affected by expanding development in at-risk areas, expansion of impermeable surfaces, wetland loss, aging infrastructure, construction methods, and increased property values (Intact, 2020). The exact attribution of events to climate change could become less important over time, however. Improving resilience to these types of events is important regardless of whether each event is directly attributed to climate change.
Box 2.1: Attribution of Extreme Events to Climate Change
A new stream of climate science research has emerged that focuses on event attribution. It evaluates the extent to which the probability or intensity of an extreme event or type of event has changed as a result of increasing concentrations of GHGs in the atmosphere.
For example, a 2017 study by Teufel et al. looking at the 2013 Alberta floods found that climate change increased the likelihood of extreme rainfall in the region but that the snowmelt runoff contribution to flooding was not linked to human-caused climate change. Similarly, studies analysing the 2016 Fort McMurray wildfire found that climate change increased the likelihood of wildfire risk and extended the fire season in the region.
Sources: Teufel et al., (2017); Tett et al. (2018); Kirchmeier-Young et al. (2017); ECCC (2019).
- Natural disaster costs do not capture the full impact on economic growth. Adding up expenditures from an event is not the same as measuring the impact on the economy. However, our usual measure of economic growth—GDP—has drawbacks as well. First, rebuilding efforts typically increase GDP, as they add to economic activity. Second, losses in wealth or assets such as property values are not captured (Antunes & Bernard, 2016). It also does not include the opportunity cost, as more government spending on disaster response and recovery will likely mean spending less on other government services. Aggregate provincial or national estimates of the GDP impacts can also miss important local effects. The Fort McMurray fire, for example, resulted in only a 0.1 per cent impact on Alberta’s 2016 GDP (Box 2.2). Tracking multiple types of costs at different levels of disaggregation and analyzing their impact on business and household activity over time would provide a more complete picture of the effects on the economy.
Box 2.2: The Economic Impact of the Fort McMurray Fire
The 2016 Fort McMurray fire resulted in over $5 billion in insured losses. There were also an estimated $1.4 billion in lost revenues from oil production. Federal, provincial, and municipal governments provided $615 million for recovery, with an additional $319 million from the Canadian Red Cross. A 2017 study found that the total cost of the fire was almost $9 billion when mental health and environmental impacts were included. The estimated net impact of the fire on Alberta’s 2016 GDP, however, was only 0.1% ($465 million).
Sources: Adriano (2017); MacEwan University (2017); Antunes & Bernard (2016); Conference Board of Canada (2016).
- Natural disaster costs do not measure progress towards economic resilience. Over time, trends in the costs of climate change reflect both increasing climate risks from a changing climate (exposure) and the extent to which Canadian governments (at all levels), businesses, and households are preparing for and adapting to these risks. As a result, selecting an indicator to measure progress on economic resilience is challenging. As more risks are measured and extreme events become more intense and frequent, we could see an increase in costs. This does not mean adaptation efforts are not working, however. In order to assess effectiveness, we would need to compare actual costs to an estimate of what costs would have been in the absence of action. Analyzing future costs associated with different climate scenarios is therefore an important tool to establish a benchmark against which to assess the success of adaptation efforts.
Significant data gaps undermine our ability to understand the historical and future (expected) costs from climate change.
In terms of historical data, the Canadian Disaster Database does not provide consistent or comprehensive information to track costs over time. Cost information is not standardized or disaggregated, limiting the ability of researchers to undertake analysis that could identify priority areas for policy intervention. In many cases, certain types of costs (e.g., costs to household property) are unknown and omitted. Some events may not be recorded at all, particularly for small, Indigenous, and Northern communities that lack reporting capacity. Further, the database does not track the costs of non-disaster-related impacts that result from slow-onset climate change, which require very different datasets and analytical tools.
Climate change risk assessment, which is important for adaptation decision-making at both public- and private-sector organizations, is also a key gap. These risk assessments rely on both historical data and forward-looking scenarios of climate change impacts to help governments, homeowners, businesses, insurers, and lenders understand the most significant risks they may experience in the future and can inform adaptation actions. Understanding of historical and current risk is informed by information gathered during past disasters and through tools such as flood risk maps (Minano et al., 2019).
However, data regarding past events are inconsistent, and Canadian risk mapping is either highly inconsistent, incomplete, or absent. Mapping future risks is even more sporadic, due both to the absence of existing baseline risk information and a lack of research on the scope and cost of future climate impacts. If Canada is going to reduce costs, governments at all levels need to ramp up investment in efforts to improve our understanding of risk.
Assessing potential future slow-onset climate risks is yet another challenge. This requires a more comprehensive and systematic assessment of the potential impact of future climate scenarios on different sectors of the economy.