Infrastructure Is Local – Financing Resilience Must Be, Too

By Andrea Colnes and Stacy Swann

When the costs are tallied, Hurricane Matthew will become the thirteenth extreme weather event of 2016 in the United States to cost more than $1 billion in damages, including four flooding events and nine severe storm events.  The damages here and abroad from Matthew will affect entire communities – their housing, businesses, and major infrastructure, including power plants, roads, water and bridges.  In August, an extreme flooding event brought more than 25 inches of rain in two days to Baton Rouge, Louisiana, damaging more than 100,000 homes and costing the economy more than $10 billion.

Many of these $1 billion-plus events in the United States have been officially labeled by the National Oceanic Atmospheric Administration (NOAA) as  “1-in-500-year” events, and some have risen to the level of “1-in-1,000-year” events.  The moniker is important both because it conveys the truly historic severity of these events and, for the mundane process of recovering any compensation through insurance, it marks these as events as close to “acts of God” as you can come.  In insurance-speak, these are “tail-risks” or “black swan” events, meaning they are severe and not expected to happen frequently.

While some scientists will shy away from attributing direct causation, most will agree that these extreme weather events are just the sort you would expect to see with a warmer planet. They will warn that the intensity of storms will increase, as might the frequency, possibly causing some 100-year floods to become 10-year floods by midcentury.  The facts on that point are in: 2015 was the warmest year on record, and every month since October 2015 has broken a warming record.  Should the frequency of these climate-related extreme weather events rise as warming continues, these tail risks will be more common.

We also know that the people who face the greatest risks from climate change are those least able to absorb the costs, and their ability to recover after these events is even further limited. This is true in both developed and developing economies. The World Bank has highlighted repeatedly in its Turn Down the Heat reports that climate change threatens to undo our progress on poverty alleviation and severely hinder economic growth.  In Louisiana, for example, most of the 100,000 homeowners were under-insured or had no flood insurance, making the recovery and rebuilding efforts more challenging in a state where 1 in 5 people live in poverty.  In Haiti, Hurricane Matthew wiped out more than 90% of the countries’ communities in the south and killed more than 1,000 people.

Chronic under-investment in infrastructure also affects a community’s ability to recover from disaster.  Building back better should be a matter of “building in” resilience to future conditions.

The first place to start is infrastructure.

Resilience Is Infrastructure

Whether here in the United States or across the world, climate-smart, resilient infrastructure will be crucial for communities to survive extreme weather events. Most of today’s roads, bridges, housing, transportation, and water infrastructure weren’t built to handle the risks of climate change in mind. Yet many of the solutions for building resilience to climate change must be local solutions.  This is because the ways that our climate will change will be context-dependent, and what affects one part of a country or state may not affect another part in the same ways.

Building resilient infrastructure is a good financial bet, not just because it can help us weather the weather better, but also because such a significant portion of our nation’s infrastructure is aged and in some cases failing. The American Society of Civil Engineers’ latest Infrastructure Report Card update grades the current state of U.S. infrastructure at a D+, and it estimates that failure to address the infrastructure gap could cost the economy up to $4 trillion in GDP and up to 2.5 million jobs by 2025.

National, regional, and local infrastructure plans have the potential to be major job creators.  They can help boost economic activity and growth and help address the growing risks from climate change.  Integrating resilience measures into infrastructure also has the potential to lessen the burden on existing public programs, such as those provided by FEMA and the National Flood Insurance Program.  More resilient infrastructure – such as better water management systems, or housing that is designed to withstand flooding and storms – inherently withstands these shocks better and reduces economic and financial damages.

Integrating climate resilience into the design of infrastructure is fundamentally about understanding how local conditions will change, and what types of resilience measures will be needed for that context.

Financing Resilience Is Also Local

If building climate-smart, resilient infrastructure is inherently a local or regional effort, having financial options that are local or regional would be highly beneficial.  In many parts of the world, local and regional financing options for infrastructure are limited (or non-existent), and national or international options may be less able to comprehend the specific and contextual local resilience needs.

In finance, there is growing awareness that existing institutions need to increase their efforts to understand and manage climate risk in their investments, including, importantly, those climate risks relevant for infrastructure. And, there seems to be a growing awareness at all levels of government that bringing necessary financing mechanisms to the local level is the right approach to addressing resilience needs.

Over the last few years, the need to create local financing solutions – including green investment banks – to address climate change has been highlighted by groups such as the UN Inquiry on Sustainable Financial Systems, the G20, and the recently published New Climate Economy 2016 global report. Existing green investment banks are a valuable part of the financial ecosystem, focusing on scaling up local and regional investments in clean energy.  The green bank model – primarily blending public funds to catalyze private capital to scale up clean energy investment at local and regional level – can provide a vital link towards building climate-smart and resilient infrastructure.

Investing in infrastructure can be enormously complex, and infrastructure projects often require a multitude of public and private financiers and investors. In the United States, a national infrastructure bank to help states and municipalities finance local infrastructure could help to ensure that resilience measures are incorporated into local and state financing mechanisms to accelerate resilient investments.

In addition to developing new approaches to cross-sector investments, we need to find new ways to measure and assess risk to support and drive this evolution in financing strategies. Bringing the needed capital and investments to the local and regional level, including to urban cities within the pressing timeline of climate change includes a number of key elements.

First, governments need to develop new strategies to support state and local financing of resilience investment.  In emerging markets, for example, urban infrastructure is expected to make up roughly two-thirds of total infrastructure investment by 2030, according to New Climate Economy.  By providing a stream of federal funds to states and municipalities for a comprehensive range of financing, including loans, innovative market-building financial products, loan guarantees, and other forms of risk mitigation and credit enhancement, governments  can accelerate capital flows into resilient infrastructure and remove barriers to investment. In the United States, this was proposed in the recently introduced US Green Bank Act of 2016. Channeling finance through state or local institutions that have a directed purpose to scale up climate-smart, resilient investment can enable states and cities to better assess and minimize risk through local knowledge of partners and projects.

Second, developing methodologies to assess climate risk – particularly those physical climate risks – and approaches that incorporate the costs of climate-related externalities will enable resilience to be more accurately valued in climate-related investments. We have seen this in the power sector, where external costs of energy are included in investment and regulatory decisions.  We need a similar approach to quantifying the resilience needed to exist in the warmer planet of our future.

With the potential flock of black swan events on the horizon, the costs of failing to invest in resilient infrastructure are high, and people and our economies will pay the price. A national infrastructure bank, local and regional green banks, and resilience standards can help direct investment into building the kinds of resilient infrastructure that climate change will demand in the future.