The financial impact of 2020's wildfires

Federal report warns climate change could spark a financial crisis

Sep 14, 2020 | Editorial | Government
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A record year for wildfires is underway...

As more than 85 fires currently rage across the Western US, adding to the 5.5 million acres of land that have already burned. If it seems every year is a record year, you wouldn’t be far off: in California, the annual acreage burned has increased by more than 500% since 1972. The force behind the rise in blazes according to many experts? Climate change. This once controversial topic is now so widely accepted that a federal report from Commodity Futures Trading Commission warned that climate change could bring about a financial crisis. But how can something as regional as a wildfire potentially harm the entire US economy? The Post is here to help break it down.

A change in thinking

Traditionally, economists have seen wildfires as localized shocks, devastating the economy of a particular region, but not necessarily a nation. Climate change has shifted their perspectives by drastically increasing fire frequency and the number of homes at risk of fires. Cal Fire, the state's fire-fighting agency, estimates that roughly 25% of California's 12 million homes are at high risk from wildfires. Economists now worry that this could send property values crashing as prospective buyers grow wary of buying fire-risk homes. And home values may be further depressed by the growing costs of insurance, as homeowners get stuck with pricier policies after their old insurers balk at the idea of renewing in a fire-prone area.

Low home values mean more mortgage defaults

These lowered home values could also increase mortgage default risk. Why? People counting on selling their home as an investment may suddenly find themselves saddled with a property no one wants to buy with pricey insurance and decades left of a mortgage to pay. When these mortgage holders default, they damage multiple parties, including the banks that financed the mortgage, other mortgage holders, and even markets where mortgages are sold. If this process sounds familiar, it might be because these same mortgage-backed securities were part of what triggered the 2007-2009 financial crisis.

And less valuable homes = less $$$ for towns

Lowered home values don’t just affect mortgage risks. They also reduce the amount of property tax a city can collect. As a result, cities see less revenue, and they certainly won’t be able to count on tourism to make up the difference. Increased fire risk could dissuade potential visitors, resulting in fewer sales tax and lodging tax dollars for towns, all of which put the municipal finances at risk. Together, climate-induced challenges facing cities and mortgage securities could pose serious risks for the US financial system.

That all sounds bad. What can we do?

If you pay taxes, you’re already helping, no matter where you live. In 2018, California’s last major wildfire year, an estimated $1.8 billion was spent suppressing fires across the state, and roughly 83% of that was covered by the federal government and taxpayer dollars. And while reversing climate change is a complex and daunting task, one key area that could help mitigate the damage is housing policy. Some states (like California) have legislation that makes building in coastal urban areas challenging, pushing housing development into areas where fires are more frequent and harder to fight. Voting in favor of local measures that expand housing opportunities could help keep current and future renters and homeowners from living near high-risk areas. While tiny acts all too often seem to be the cause of wildfires, voting may be a small step with the power to help curb their impact.