The Market is putting you at risk
We need markets to stop giving people the wrong climate signals
Anyone who has ever attempted to design effective public policies will attest that—in the words of Nobel-winning economist Richard Thaler—“the world is hard” (Thaler was not awarded his Nobel memorial prize for this intuition, our readers will be pleased to know). The complexity of the world is compounded by the fact that people are constantly asked to make decisions using inaccurate, hard to understand or, worse, incomplete information. By making things harder to predict, the climate crisis is making decision-making even harder.
In his recently published book On the move, ProPublica reporter Abraham Lustgarten suggests that the climate crisis will ultimately drive the U.S. population northwards through a steady worsening of a variety of factors, including crop yields, home insurance premiums, water utility bills, air conditioning costs, among others. Yet, market signals are currently pointing in a diametrically opposite direction.
Take the U.S. insurance market. Since some State regulators intervene to limit home insurance hikes, while others do not, homeowners are often left with the perverse incentive to move to areas at higher climate risk (such as Texas and Florida) or to stay in areas where their climate risk is not priced appropriately (the West coast).
Insurance premiums are just one of the financial factors influencing people's decision to move to areas at higher climate risk. Relatively cheaper housing and a lower-tax environment are driving more people and businesses to Florida and Texas, despite sea-level rise, ever stronger hurricanes, and (mostly self-inflicted) power outages being present impacts, rather than future threats.
It’s unclear for how long tax breaks and market distortions will be able to outweigh climate impacts in shaping the migration patterns within the US—but the key message is that city leaders should not be assuming that the market will lead residents to safety. In fact, here are some examples to show how markets commonly fall short.
Naïve markets
Sometimes well-intentioned ideas reveal the naivety of the “market as a saviour” approach—just ask pollinators. As we noticed that their numbers had started to fall, campaigns to “save the bees” (as a misleading catch-all term for pollinators) gained momentum. The market responded in the best way it can—by focusing on fixing the issue by monetising honeybees to make a profit. The lack of nuance of this approach actually hurt biodiversity, as other pollinators were outcompeted as the number of honeybees climbed to record highs, according to data from the Food and Agriculture Organization.
Path-dependent markets
Cities know far too well that markets are far less rational than their most staunch promoters maintain and their fabric is testament to it. In the Western hemisphere, where the prevailing winds blow from the West to the East, cities where the Industrial Revolution took place saw higher air pollution levels in their East-side. Historically, this meant that wealthier residents tended to settle in the West side of cities. During the following decades, the neighbourhoods in the East side have thus lagged behind, even as this air pollution effect disappeared as cities de-industrialised. This was due to the ruthless power of path dependency, the process by which what has happened in the past continues to happen, because of resistance to change. This is hardly a valuable behaviour (or a rational one) for markets to have in a changing climate.
Poorly regulated markets
Sometimes it is not the fault of markets, but of their intended fix. When States in the USA pass regulations to limit hikes in insurance premiums, they do so to protect homeowners. However, as we’ve discussed in a previous newsletter, when insurers are not allowed to raise premiums as they please, they may decide to leave a State market altogether, leaving the public sector to pick up the tab. Unintended consequences can follow even well-intentioned policies, if these are not well calibrated.
Markets as force to be reckoned with, not inherently a force for good
In fairness, markets are a fantastic social (and sometimes physical) infrastructure where supply and demand for labour, products, and services meet. When the exchange of goods and services happens for a profit, markets are a force to be reckoned with. But when they are used as a tool for more complex objectives—such as adapting to the climate crisis or helping people to minimise their exposure to climate risk while retaining access to job markets and community life—they are not reliable to deliver the best outcome for society without well-designed regulation.
If it is true that the world is hard and the climate crisis is making things harder, then one of the roles of city leaders is to ensure that markets function as a force for good, instead of adopting orthodox pro-market positions that may end up hurting their residents.
💡 Call for papers from the Journal of City Climate Policy and Economy
How can cities shape and support thriving places that create prosperity for all residents within Earth’s planetary boundaries? The Journal of City Climate Policy and Economy, a collaboration between C40 Cities and the University of Toronto Press, have just published a call for papers for their upcoming Special Issue on sustainable prosperity in the 21st century city.
The Special Issue invites contributions from:
Researchers and academics;
City practitioners (city officials and civil society organisations) with relevant case studies.
For more information on how to submit your 250-word abstract (deadline Friday 6 September 2024) visit the JCCPE website.
📚 What we’re reading
: Life Ceremony by Sayaka Murata. A collection of dystopian (?!) short stories that in a slightly off-putting yet eerily intriguing way question the behaviours we have come to perceive as ‘normal’. Not for readers with an easily upset stomach though!
: I expect city-lovers to find as much enjoyment as I did in Lunch Poems by Frank O’Hara. This little collection of poems—written during the author’s lunch breaks while he was working at New York’s Museum of Modern Art—has recently turned 60, yet it is powerfully modern. Just look at the last few lines of Steps, one of the more upbeat poems in the collection.
No the government policies are putting The people at risk