The policy standoff between reducing flood damage and avoiding it

If governments responded to floods like individual homeowners, nailing planks of wood to walls and windows, it would be considered foolhardy. But, this metaphor is hardly a stretch. Acting to salvage regions after the damage is done, perpetuates a cycle of loss that is hard to break.

Climate change has made all kinds of severe weather events more frequent, deadlier and costlier. Yet, there is something more gradual and totalitarian about sea level rise that also makes it less obvious. Coastal cities, however, are forced to pay attention. Whether it is because homeowners like a sea view, farmers want easy access to water, or the availability of ports nearby, being close to water has always been valuable. As a result, urban development within coastal cities has concentrated in areas that are the most susceptible to flood damage.

Take a guess about how urban settlement in high-risk flood prone areas in the United States has changed over the last three decades. Draw your answer in the chart below by dragging the dot.

Governments face a policy dilemma. On the one hand, they need to ensure that vulnerable regions are protected. Flood insurance and infrastructure development can help with that. But that slows down long-term adaptation, making the process of moving in-land slower and costlier to governments. Researchers in the Netherlands have simulated that flood insurance that does not account for risk appropriately will lead to larger population growth in the European floodplain, for example. Governments need to balance short-run and long run concerns. Offering protection to coast settlements today slows down the process of migration away from high-risk areas because it lowers the immediate risk of flooding. At the same time, focusing on development of coasts may come at the cost of infrastructure development in-land, which also discourages movement of homes and businesses towards lower risk neighborhoods.

Take the case of Jakarta. By 2050, 35 percent of the city will be underwater. The government has proposed to build a sea-wall which will cost up to $40bn. The protection of the sea wall will slow down the movement of people and businesses to less flood-prone areas. But it also creates what economists call a moral hazard problem. Developers do not take into account the city’s cost of protection. Once the building is built, governments cannot resist stepping in to protect them in the next flood. Knowing this, developers continue to invest in high-risk areas.

In a recent working paper, Alan Hsaio of Princeton University has shown that this could keep real estate prices high even as floods ravage these regions. This problem will be the most difficult to solve because each government will view it as a problem for a future government. They will continue to develop at the coast, despite being well aware of the risks.

This is a fundamental problem that will face all coastal cities, not just Jakarta. Even the most accurate estimates of risks and damage will wither on the doorsteps of politicians. According to Hsaio, the solution to this problem is a commitment on the part of the government to provide only a minimal level of protection to coastal properties and no more. This could also take the form where governments commit to retreating from protection in a phased manner, offering residents and businesses sufficient protection in the short-term while encouraging movement in-land in the long run.

Even this would be hard to achieve. Any government that tells its people it will not protect its coastal communities is unlikely to find its way back to office.