Climate Change: The Fiscal Risks Facing The Federal Government/Understanding the Risk Assessments in this Report

by Office of Management and Budget

Understanding the Risk Assessments in this Report

OMB selected five key areas that are clearly vulnerable to climate impacts, have a strong link to the Federal Budget, and for which the scientific and economic literature has produced quantitative modeling of impacts: crop insurance, health care, wildfire suppression, hurricane-related disaster relief, and Federal facility flood risk. In each of these areas, OMB and CEA worked with experts across the Federal Government to leverage the best available quantitative modeling to estimate key effects of climate change and the associated fiscal burden.

Each risk assessment draws either on findings from the best available scientific and economic literature or new analysis that uses existing models and datasets. While the assessments generally compare an unmitigated climate change scenario to a projected reference scenario without further climate change in mid- and late-century, specific climate scenarios, global change models (GCMs), and time periods vary across assessments due to differences in available studies, datasets, and models. As a result, findings are comparable across risk assessments only at the order-of-magnitude scale.

In addition, due to limitations in available models and the uncertainty inherent in projecting several decades into the future, the results of these assessments should be interpreted as indicative of the order of magnitude of potential impacts of climate change on Federal spending in the studied scenarios. Actual impacts will vary depending on a wide range of factors such as population and income growth, policy changes, technological development, changing behavior—including adaptive responses—and the magnitude and pace of further climate change.

Generally, the assessments do not attempt to fully represent the potential for adaptation or policy changes to attenuate fiscal impacts. For example, the Federal facilities assessment does not examine the potential for investments in protective coastal infrastructure to guard against the risk of inundation from sea level rise. The crop insurance assessment assumes farmers will shift crop rotations to maintain profitability in a changing climate, but does not examine the potential for technological advancements to bolster crop resilience to impacts like drought. Adaptation mechanisms like these, while costly, would also reduce the climate impacts that will actually be realized. As such, the results presented in this report are not predictions of the future; instead, they illustrate the magnitude of costs that would be incurred given the set of assumptions that form the scenarios modeled. Each assessment discusses the kinds of adaptation that are represented in the modeling and those that are not.^[1]

The assessments are also not comprehensive. Due to modeling limitations, several are missing key risk drivers. For example, the health assessment captures only Federal spending for non-fatal health outcomes related to air quality—likely a slim component of the full fiscal risk related to health care and public health. Also not captured are several likely areas of fiscal risk such as national defense, Federal assistance for transportation infrastructure maintenance, and disaster aid for climate-related events other than hurricanes that will add to the total fiscal burden of climate change. In short, the actual fiscal risks to the Federal Government are likely to be much greater than the sum of what is quantified in this preliminary assessment.

Finally, fiscal impact estimates in mid- and late-century should be viewed in light of a growing economy. The Federal Government’s ability to manage the fiscal burden of a major storm or severe drought, for example, will likely be greater decades from now than today, given that real GDP is projected to double by 2050 and quadruple by 2080. The estimates in the risk assessments that follow are presented both in real (current) dollars and GDP-adjusted dollars. The second approach conveys the estimates at their equivalent scale in today’s economy in terms of the percent of U.S. GDP that they represent. The GDP adjustment simply rescales estimated costs from the modeled year to the present based on projected real GDP growth in the intervening period, such that real dollar estimates and GDP-adjusted dollar estimates reflect the same percentage of real GDP in the modeled year and present year, respectively.

1. Similarly, the illustrative estimates of revenue impacts discussed earlier in the overview are drawn from IAMs that incorporate adaptation to varying degrees.