University of California, San Diego
Title: “Moral Hazard, Forest Fires, and Adaptation to Climate Change”
Abstract: Many important adaptive responses to climate change will occur through government investments, as opposed to private market transactions. Government programs and investments in infrastructure, public health, national security, scientific research, and emergency response can lessen the costs of climate change. At the same time, these large public investments raise basic 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. The frequency and severity of wildfires are increasing due to climate change. The federal and state governments now spend billions of dollars each year on wildland firefighting. 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 single family homes in the western U.S., we estimate the causal impact of nearby private homes on federal firefighting expenditures. We then use those estimates to calculate the implicit transfer to homeowners due to fire protection spending that is devoted to protecting homes. Finally, we apply simple 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, and 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 net present value of fire suppression costs exceeds 5–10% of total property value.