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Moral Hazard, Wildfires, and Adaptation to Climate Change

Many important adaptive responses to climate change will occur through government investments in infrastructure, public health, emergency response, and other areas. These large public investments raise classic public economics questions about moral hazard, distributional impacts, and allocative efficiency.  We examine these questions in the context of wildland fires in the western United States.  Increased wildfire risk is one of the most salient impacts of climate change in North America. The federal government's annual cost of wildland firefighting is now in the billions of dollars and continues to increase.  This paper considers these expenditures as an in-kind benefit to homeowners in high fire-risk areas.  Using historical firefighting data and parcel-level data on the universe of homes in the western U.S., we estimate the causal impact of private home development on federal firefighting expenditures.  We then use those estimates to calculate the implicit transfer to homeowners due to federal fire protection spending, at the individual parcel level.  Finally, we apply spatial equilibrium reasoning to quantify potential distortions in new residential construction due to moral hazard, and to explore a policy counterfactual where developers pay a fee equal to the expected net present value of fire protection costs at the time of initial home construction.  We find that residential development dramatically increases fire suppression costs; that firefighting costs are strongly non-linear in the number of homes threatened, so that per-home protection costs depend strongly on development density; and thus that federal firefighting efforts represent a large transfer of federal revenues to a few landowners in high-risk, low-density places.  For our highest-cost categories of homes, the expected net present value of the cost to the federal government to protect these homes from fires exceeds 5-10% of total property value.