A search and rescue team searches the remains of a home burned by the Palisades Fire, in the Pacific Palisades neighborhood in Los Angeles on Jan. 14.David Ryder/Reuters
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
“When one suffers, we all suffer.” We’re starting to see, in our daily lives, how apt this bit of biblical wisdom may be.
For many Canadians, the Los Angeles wildfires bring back unpleasant memories of the fires that ravaged this country in 2023. But more than merely triggering recollections and compassion for those suffering right now, the destruction in California is likely to ricochet through our economy, hurting all of us.
When asked if climate change is behind individual incidents like these wildfires, scientists are usually reluctant to attribute cause. But what they are much more confident in saying is that the altered weather and environmental patterns resulting from climate change ensure that the overall intensity and severity of these events will rise.
The evidence bears them out. The incidence of such extreme weather events has risen some sevenfold since the 1960s, and so too has their economic toll. The Los Angeles fires are now expected to be the costliest disaster in U.S. history, with initial estimates of damages in the US$250-billion range – and climbing fast.
That may seem like pocket change in a US$27-trillion economy. Moreover, the cleanup and rebuilding that follow disasters give a jolt to output, which is why economists have long been able to regard them with equanimity. However, a hit to national output of nearly a full percentage point becomes a lot more substantial if it starts recurring often. After all, the Los Angeles wildfires arrived just a few months after a trifecta of hurricanes knocked an estimated 10 per cent off the Florida economy.
By coincidence, the wildfires broke out in the same week that Munich Re issued its annual report on the total global cost of natural catastrophes, which last year came to some US$320-billion, of which US$140-billion was insured. While this might again seem manageable in a US$100-trillion world economy, the problem is that the average annual costs of such events are now rising more rapidly than global output. That’s not accidental. In the week all this was happening, the Copernicus Observatory reported that last year, for the first time, the planet breached the target set in the Paris Agreement of limiting global warming to 1.5 C above preindustrial levels.
Beyond that threshold, the risks and effects of climate change were expected to rise sharply. It’s now clear that the planet is warming faster than anticipated. And with that, we can expect the incidence and ferocity of climate events, and their attendant costs, to keep rising with equal speed. Over time, climate change will thus erode growth until, ultimately, it could potentially stop it altogether.
While that won’t happen in the near future, which is why so many of us are willing to dismiss worries about climate change, what is happening now is that asset prices are starting to feel the pinch. Insurance companies are being forced to reprice insurance policies in areas prone to extreme weather events, making some properties uninsurable and thereby lowering their resale value. That in turn knocks the chain of assets backed by real estate, such as banks and real estate investment trusts. Some analysts even believe the U.S. may be just one big disaster away from a financial crisis.
Yet perversely, at the same time some properties are becoming worthless, the prices of others are soaring. Given the city’s sudden scarcity of housing, Los Angeles has become a seller’s market, and rents are increasing dramatically. Yet again, in the sea that is the U.S. economy, such local spikes amount to a drop in the nationwide inflation bucket. The problem is, given that inflationary pressures are rising once more, the growing number of these localized price shocks will accelerate the long-term increase in inflation that many economists expect will result from climate change.
That, in turn, will support the rise in long-term interest rates we’re now seeing, as central banks try to tamp down inflation. Many market analysts believe we’ve entered a long-term bear market in bonds, with rising yields that boost long-term borrowing costs. With credit costs rising, other markets are already starting to feel the heat, the U.S. stock market having wiped out all the gains of the postelection “Trump bump.”
Slowing economic growth, rising prices, more expensive loans, falling investment portfolios. Yet given the current anemic state of the economy, many politicians are still calling to scrap climate-friendly policies and use cheap carbon-based energies to boost growth. Many voters, eager to see immediate gains, concur.
However, as is becoming apparent, the more we try to grow the economy using carbon-based energy, the faster these feedback loops will multiply, slowing the economy. We’ll eventually end up running to a standstill, then falling backward.