Climate Change and the Economy: Perverse Incentives in America

In late March, the Biden administration published a report in which the federal government acknowledged the interconnectivity between climate change and the economy, confronting the vast implications this relationship will have on both our planet and economic systems. Just like the private sector, the federal government is realizing that it is going to have to make some changes in the way it is structured to successfully adapt to climate change.

At the moment, the government is guilty of creating “perverse incentives” through policies that encourage citizens to make the wrong choices. Though Americans are already making decisions based on the effects of climate change (which companies to invest in, where to purchase a home, when to take a vacation, etc.), government policies undercut logical decision-making. As stated by the New York Times Economist, Jim Tankersley, “Right now [the federal government is] encouraging people to take more risk in the face of climate change. To do riskier things, more expensive things that they probably shouldn’t be doing if the world is going to keep warming like this.”

For example, because private flood insurance in high-risk zones is unimaginably expensive (reflecting the true cost of insuring a house in a flood zone), the federal government backstops the private insurance companies, allowing Americans to continue to build, live and then rebuild in areas that are likely to be impacted by severe flooding – effectively subsidizing the true cost of the insurance.

The same goes for other natural disasters, such as wildfires. The federal government spends immense amounts of money each year attempting to fight fires that are mostly uncontrollable. Of course, it does so to protect those who live in these areas – their homes and their livelihoods – but it is also allowing people to continue to live in places that are becoming unhabitable with the false sense of security that comes with a government that is willing to do whatever it can to allow things to stay fixed as they are.

What it boils down to is a general fear of change – of shifting the paradigm to one that can look directly at the realities of climate change and say, “I see you, and I’ll work with you.” Unfortunately, the longer we collectively hold out on this acknowledgment, the bigger a hole we will dig for ourselves. Whether in the public or private sector, the worst thing we can do is continue to stick our heads in the sand and act like we are still living in the 1980s.

With the news that, for the first time, the federal government is coming clean about its role in perpetuating risky climate behavior, we can see a promising shift in the way climate change and the economy will be managed in the future – one that will be both better for people and the economy.

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Being a part of the solution, and not the problem, can help both your business and the planet. Contact Withum’s Environmental, Social and Governance Services Team today to work on meaningful change.