In 2016, the Office of Management and Budget and President Obama’s Council of Economic Advisors produced a preliminary assessment of some of the fiscal risks associated with climate change. In this box, we describe the estimated potential costs of these fiscal risks, which could affect both expenditure and revenue.

In November 2016, the US Office of Management and Budget (OMB), in collaboration with President Obama’s Council of Economic Advisers, presented a preliminary assessment of some of the fiscal risks associated with climate change.a Guided by the available climate studies and economic modelling, it included five detailed risk assessments – covering expenditure risks related to crop insurance, air quality and health care, wildfire suppression, coastal storm disaster relief and flood risks to Federal government facilities. It also illustrated the potential revenue costs of climate change reducing the level of US economic activity.

The bottom-up programme-specific expenditure risk assessments pointed to various ways in which climate change will raise Federal spending in the US. The overall cost estimate was dominated by the projected increase in spending on coastal disaster relief. In total it was put at between $9 billion and $28 billion a year by late in this century (around 0.05 to 0.15 per cent of US GDP in 2016). But the report stressed that this did not represent a complete assessment of the spending implications of climate change. Important areas were not quantified due to lack of reliable inputs to model them – for example, the focus on the health costs of air quality changes was considered likely to reflect “only a slim component of the full fiscal risk related to health care and public health”. As well as the scale of the risk, the report noted that the variability of calls on affected spending programmes was likely to increase, causing greater recourse to safety nets and challenges for expenditure planning.

The indicative revenue hit was calculated top-down using a commonly utilised economic model that puts the global economic cost of a four-degree climate scenario at 4 per cent of global GDP and simple assumptions about the US share of global economic activity by the end of the century and the revenue share of GDP.b It therefore illustrated the revenue loss associated with an unmitigated climate change scenario relative to a reference scenario assuming no further climate change. On that basis, the revenue cost in today’s terms by the end of the century was put at $56 billion to $111 billion a year (around 0.3 to 0.6 per cent of US GDP in 2016).c

A comparable calculation for the UK would yield a range of revenue costs in today’s terms of £16 billion to £32 billion a year by 2100.d

The OMB’s assessment of flood risk to federal property was not included in its expenditure risk estimates. Instead, it reviewed a sample of all federal property and identified $83 billion of federal assets located within the 100-year floodplain, $23 billion within the 500-year floodplain and $62 billion in coastal assets that would be threatened by inundation or otherwise severely affected in a scenario in which sea levels rose by six feet. The Congressional Budget Office has estimated more recently that annual expected losses from hurricane winds and storm-related flooding total $54 billion, with $12 billion of this expected to fall on the public sector.e

This box was originally published in Fiscal risks report – July 2019

a US Office of Management and Budget, Climate change: The fiscal risks facing the Federal Government, November 2016.
b Nordhaus, W., The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, 2013.
c The range was generated by different assumptions about the US share of global GDP by 2100 – which varied from 10 to 20 per cent, with the higher figure being roughly the US share of global GDP at the time.
d This is equivalent to 0.7 to 1.5 per cent of GDP. It is considerably higher than the OMB’s figure for the US because it covers total receipts (which we forecast to be 36.8 per cent of GDP in 2019-20) whereas the OMB figure relates only to US Federal Government revenues (i.e. excluding state and local governments), which the CBO estimates to have been 17.6 per cent of US GDP in 2016.
e Congressional Budget Office, Expected Costs of Damage From Hurricane Winds and Storm-Related Flooding, April 2019.