The cost of disaster: Putting a price tag on climate change

©2012 Ann Goodman

Professor John Mutter

In this era of apparently mounting natural disasters worldwide—many, such as floods from hurricanes, likely related to changing weather patterns linked to climate change—one might ask: How much do such disasters cost? How are the costs calculated?
In fact, someone has asked—analyzing not just the cost of the event itself, but the larger economic costs linked to build-up and often long recovery.

“The public focus [of a disaster] is on the moment, the trauma of the extreme event,” says John Mutter, Professor of Earth and Environmental Sciences, as well as International Public Affairs, at Columbia University’s Earth Institute. “The economic loss focuses on that moment, too—what was actually lost at the time.”

However, that loss to the economy—the chain of production, consumption and everything that goes into it—doesn’t happen in a moment, but actually begins after, he says, “with losses that go beyond the value of the built structures trashed at the time, beyond the capital asset loss, to a deeper economic loss that happens over time.”

Three-pronged process

The theory of calculating disaster costs is just developing, as natural disasters become more prevalent; business can incorporate principles from a three-pronged process into new strategic thinking on what disaster is and how it might affect particular sectors or individual companies.

In fact, a climate-related—or other–disaster is a process with three key parts: build-up, event and recovery.

The recovery period is where the really big losses occur, Mutter says, due to productivity losses, lost jobs, reduced spending on education and health care, among others. The challenge is to figure out how to speed up growth after the event itself—even to the point where the economy grows at a faster rate than before the disaster. That’s a tall order. And it’s virtually impossible to do in poor countries or regions, Mutter says.

When such a recovery has actually succeeded — that is, when the aftermath leads to a more robust economy than before the disaster — it’s done so in relatively rich economies, where the focus often is less on “getting things back to the state they were in before the crisis,” than on moving in another direction, along a different, newer, more innovative path than before, and sometimes even investing in a different location, where the actual disaster didn’t occur.

Speeding recovery, changing strategy

How can an economy recover more quickly?

“The thinking behind what you do in a disaster recovery is generally to quickly get things back to a resemblance of what you had before” he says. “It’s rare to think of the post-disaster period as something needing strategic economic development thinking–how to create economic growth at a faster pace. It’s a different form of strategic thinking of post-disaster growth.”

To change strategic thinking, it’s useful to understand that “total cost to an economy is not predicted by the initial losses,” Mutter points out. “Slow recovery rates can lead to high costs, even with low initial losses,” he notes, mainly because we have to factor in growth that likely would have occurred without the disaster. So “the growth rate in recovery must exceed the pre-disaster growth,” he says.

Cause, effect, change

For instance, in 2005, when Hurricane Katrina struck New Orleans, where levees protecting industrial canals failed, “the chain of causation goes further back,” Mutter notes. “Why were [the levees] there? Why were so many people living so close to the structures, and how did they benefit from that? Human beings put things there.”

As with parts of the infrastructure, like roads and bridges, if the disaster is seen as an opportunity to clean the slate and start over, it could even be used as a growth opportunity.

Sometimes in the developed world, as in the 2011 earthquake and subsequent tsunami in Japan, the disaster represents an opportunity to rebuild many parts of the economy—physical and social—in a better way.

New Orleans, where human beings initially located industrial canals in the levees to facilitate shipping, is another opportunity to rethink economic strategy. For instance, says Mutter, New Orleans now has the opportunity to rebuild its school system, previously one of the poorest, from the ground up; improved education can lead to a more robust economy longer term.

To get a handle on rethinking post-recovery strategy, Mutter says it’s also crucial to analyze: “What sort of growth trajectory were you on before? Where would that put you in terms of average income, when did everything get back to the same place it was before the disaster? When did the town produce at same projected level as before.”

The goal is to identify the trajectory required “to get back to where you were before the event,” he says. “The somewhat counter-intuitive issue here is that if the economic growth rate was fast before the event it may need to be unrealistically fast after to regain the same growth trajectory.”

Is post-recovery gain possible?

How can new strategies lead to better post-disaster results?

The first thing is to encourage an understanding of disaster not as a specific event but as the entire process that includes boosting economic growth after the initial trauma.

Sometimes that may mean not jumping to repair what’s been damaged so much as stimulating areas that weren’t damaged in order to make the economy grow, says Mutter. That’s mainly because it can be harder to make places grow “when they’ve been trashed,” than to start on a new track somewhere else.

The point, says Mutter: “Focus on things that are still OK and invest in those. It may sound the wrong thing to do, to throw money elsewhere, where things are more or less OK. By analogy, if, in a family of five wage earners, one loses a job, the four others might work overtime to compensate. It follows the general logic of the market.”


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