Climate change is going to add significantly to the federal debt. The big question is how much.
White House economists have spent the first two years of the Biden administration beginning to answer that question so the government can make better decisions about budgeting and spending.
A warming world means more federal spending on disaster relief and recovery, health care and the repair and replacement of vital infrastructure. Economists expect it to take a toll on the broader economy — and, in turn, the tax base. The clean energy transition will also tax federal coffers, though there are economists who expect the Treasury to see some upside.
And that’s before accounting for areas of the federal budget where the role of climate change may be harder to tease out, such as the demands placed on the military and on humanitarian budgets by a less stable, climate-stressed world.
“This is why climate change is an existential threat, because it affects every aspect of our world, literally,” said Cecilia Rouse, who recently stepped down as the chair of the White House Council of Economic Advisers. “And to understand and disentangle and to quantify every relationship is really a challenge.”
Meeting that challenge will make federal budget projections more realistic. It’s also likely to show that climate change will strain federal resources and fuel more political fights like the one that Washington just played witness to over the debt ceiling.
Republicans and Democrats alike spent the spring rehashing responsibility for today’s $31.4 trillion federal debt, armed with comprehensive analysis about the budgetary implications of the war on terror, former President George W. Bush’s tax cuts and their extensions and President Joe Biden’s spending bills.
But climate change wasn’t part of the discussion. The literature is skimpy on the toll warming is taking on the U.S. government’s financial resources.
“We have spent so much time, mental effort, energy and money trying to deal with other aspects of the economy,” said Amir Jina, an assistant professor of public policy at the University of Chicago. “Climate change, I think, is going to be a problem of equal or maybe greater magnitude in the future, and yet we give barely any thought comparatively speaking towards thinking about policies and solutions there.”
There’s still a long way to go before climate change can be built into the White House’s long-term economic forecasts.
The White House Office of Management and Budget, the Council of Economic Advisers and the Congressional Budget Office have spent the last two years churning out white papers and assessments aimed at capturing what climate change could do to federal spending and revenues. But they are not there yet.
“Every year, what we’re trying to do is to get a little closer to actually being able to do it,” said Rouse, who is now at Princeton University. “It’s very complicated.”
Last year, OMB analyzed what would happen to the U.S. budget under an extreme climate scenario and found that there was a 5 percent chance the Treasury could be taking in $2 trillion less each year in today’s dollars by 2100 than it would without warming. Under that scenario, the U.S. economy would be 10 percent smaller by the end of the century than it would be without climate change — the upper end of what central bankers expect.
Under that high-end scenario, climate change would add 18 percent to the U.S. debt burden. But OMB modeled a less extreme scenario this year showing a 50 percent chance that warming will have added a percentage or two to the debt-to-GDP ratio by 2048. That’s a substantial amount, but it would lag behind other factors, such as tax policy.
“This is all preliminary,” said a White House official who asked to remain anonymous to discuss an analysis that hasn’t yet been made public. “If we thought these were definitely the right numbers, we would incorporate them into the budget, but this is early, which is why these are scenarios with uncertainty given the stage that we’re at in calculating it.”
For its part, the Council of Economic Advisers has spent the last two years weighing how climate change could affect the macroeconomic risks and opportunities the United States will face this century. This year, it added a chapter to an annual White House economic report, which warned that climate change could make the federal safety net unsustainable.
The problem is exacerbated, the economists found, by the role the government plays in backstopping everything from disaster and crop insurance to health care and home mortgages. Those federal assurances create what economists call a “moral hazard” if, for instance, they spur farmers to plant thirsty crops in a drought-prone area or encourage local zoning authorities to allow development in a flood plain.
“State and local governments making these decisions see benefits in growth and tax revenues, but they are shielded from the full costs of risky development because of the Federal Government’s assumption of disaster risk through the [National Flood Insurance Program] and disaster relief programs,” the report states. Federal firefighting programs also indirectly subsidize development in areas susceptible to fire, they argue.
Early efforts to limit the amount of climate risk that is offloaded onto the federal government by the private sector and states have not been successful. The Obama administration proposed making some disaster assistance conditioned on state action but abandoned that effort when states pushed back.
Sanjay Patnaik, director of the Brookings Institution’s Center on Regulations and Markets, said that in the near term, Washington is likely to continue to backstop the recovery and infrastructure needs of climate-vulnerable areas even as that becomes increasingly costly. But that may not last forever.
“I expect eventually that that will not be sustainable,” he said. “It will be too expensive to shoulder all these costs across the U.S., and there will have to be some hard choices made.”