Market Forces

To make nature financing more equitable, we must understand how NCS credits are used

This blog was authored by Julia Ilhardt, former High Meadows Fellow, Global Climate Cooperation. It was originally published on EDF’s Climate411 blog channel. Read the full post here

Sun cast over forest, nature

At the end of last year, 196 nations agreed to the historic Global Biodiversity Framework, which includes the goal to protect 30% of land and sea area by 2030. Still, nature is woefully underfinanced, with investments in nature-based solutions needing to double to USD 384 billion per year by 2025, according to UNEP. 

Using crediting to incorporate natural climate solutions (NCS) into carbon markets is one way to generate significant finance for nature while cutting emissions, and it’s gaining public and private sector attention. However, both producing and using credits raises important equity considerations. A new paper from EDF focuses on the issues around use, including how credits may impact the communities surrounding polluting facilities. This blog lays out the framing, key issues, and potential solutions, with more detailed analysis available in the paper. 

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Fueling Research, Advocacy, and Community: Economic Internships at the Environmental Defense Fund

The climate crisis requires not only urgent action, underpinned by a robust framework of proven economic-driven solutions to effectively address its multifaceted challenges. Given the increasing urgency, we need economists at the forefront, conducting rigorous research and informing policy decisions. Recognizing this critical need, the Economics team at EDF is dedicated to nurturing economists who are eager to contribute to the climate fight. 

The Economics team at EDF hosts exceptional interns who make significant contributions to our work. Through internships, we aim to create lasting partnerships with talented individuals who will continue to make a positive impact in the field of economics.  

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Addressing Gaps in Disaster Recovery for South Carolina Households through Inclusive Insurance Models

This blog was authored by Environmental Defense Fund economists, Karina French and Carolyn Kousky. See their report here. 

South Carolina is no stranger to the devastating effects of extreme flooding, with hurricanes like Matthew and Florence leaving a trail of destruction in their wake. As the state faces escalating flood risk due to climate changes and continued building in vulnerable areas, it is crucial to address existing gaps and inequities in disaster recovery. In a new report, we provide a comprehensive review of the current resources available to households for post-disaster economic recovery in South Carolina and explore the extent to which innovative disaster insurance policy designs can fill these gaps and improve equity in recovery.  Read More »

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A New Pilot Launches to Support Equitable Flood Recovery in NYC

This blog was authored by Environmental Defense Fund economist, Carolyn Kousky.

Facing $150 billion annually in direct costs from climate-related disasters, the current system of disaster recovery in the U.S. is failing many families and communities.

Most households struggle with timely access to sufficient financial support for the wide-ranging expenses disasters impose. And without adequate financial resources for recovery, natural disasters can become tipping points that set back hard-earned financial gains — especially for low-income households.

A new pilot program that just launched in New York City could help address gaps in assistance and increase equity in recovery. Supported by a National Science Foundation Civic Innovation Challenge award, the effort focuses on the delays low- and moderate-income households can face in accessing funds for immediate post-disaster needs, which can range from buying a generator to mold remediation to temporary housing.

The small pilot aims to get funds to people very quickly after a flood.

One in six adults in the U.S. in 2021 experienced financial hardship from a natural disaster and people with low incomes and people of color are disproportionally harmed by these events. Many households do not have enough savings to repair, rebuild, and recover, and low- and moderate-income households are often denied post-disaster loans. Federal disaster assistance is insufficient, can miss those who need it the most, and can be slow to disburse. Disaster insurance can provide funds for property repairs and reconstruction, but can be too expensive or unavailable, or may not meet the needs of certain populations.

A team that crosses sectors and expertise— including Environmental Defense Fund, the Center for NYC Neighborhoods, the New York City Mayor’s Office of Climate & Environmental Justice, SBP, Guy Carpenter, Swiss Re, and ICEYE — has been reimagining how to help low-income households with the growing risk of flooding from extreme rainfall. As heavy precipitation events increase, it imposes serious costs on households that are often unaware of the risk and lack needed financial resources.

Fast and flexible support after a disaster

Not receiving needed funding for weeks or months — as is the case with other sources of assistance — can be problematic for households without financial buffers or safety nets. To cover emergency expenses, for example, they may be forced to reduce spending on important things, such as medical care, or may fall behind on bills.

To increase the speed of assistance, the Center for NYC Neighborhoods, a nonprofit that promotes and protects affordable home ownership, is piloting a program that would make small emergency grants available immediately after a flood hits. This requires disaster financing that isn’t slow, cumbersome, or restricted. We turned to a special insurance-like tool to meet this need: parametric risk transfer.

Parametric risk transfer is an innovation that can provide fast and flexible dollars after a disaster. With a parametric product, a measurable event, such as wind speed at a certain location, automatically triggers a payout. This means funds become available incredibly quickly.

Our team worked to develop a parametric product that will pay the Center for NYC Neighborhoods when certain pilot neighborhoods flood following extreme rainfall. Rainfall flooding was fairly new to parametric markets, so we had to work with partners to determine the specific measurement that would trigger a payment. In the end, we settled on measurement of the footprint of the flood, determined by combining information from on-the-ground flood sensors, satellite data, and social media pictures and videos taken during the flood.

Here’s how the program will work: Once a severe flood happens in a pilot neighborhood, payment will quickly be sent to the Center for NYC Neighborhoods from a reinsurance company (for this pilot, Swiss Re). The center will use those funds to activate an assistance program of emergency cash grants to cover immediate post-flood needs while households wait for other forms of assistance that take longer.

An urgent need for new models of disaster recovery

Going forward, maintaining such a program will require a fundamental shift in disaster financing.

Many institutions, for example, are happy to donate relief funds following a disaster. If some donors would instead donate smaller amounts before a disaster to cover the costs of the premium on the risk transfer product, this could generate much greater payouts when a disaster occurs and reduce the amount of time it takes for nonprofits working on disaster recovery to receive funds.

We are testing one small pilot, but there are other innovative models that could also improve climate resilience and equity in recovery: microinsurance policies for households; coupling insurance to loans made by Community Development Financial Institutions; community-based models of disaster insurance; forecast-based financing; and others.

Now is the time to test these models, in partnership with researchers, in order to evaluate their effectiveness, and then refine their design to optimize their ability to meet social goals.

These new models are urgently needed. In our pilot, we have learned that designing a new approach takes committed partnerships, conversation, and dialogue. It takes collaboration between nonprofits, community groups, insurers and brokers, local governments, researchers, and data providers. It takes an ability to listen, a willingness to try something new, and a commitment to learn by doing.

The most important thing we’ve learned? We achieve more when we work together.

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Economic Resilience to Climate Impacts Requires Making Disaster Insurance More Inclusive in the US 

This blog was authored by Environmental Defense Fund economists Karina French and Carolyn Kousky. See their report: Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

Over the past year, the U.S. has seen yet again how climate-driven disasters threaten lives and livelihoods, from the devastating hurricanes, Ian and Fiona, in Florida and Puerto Rico to catastrophic rainfall flooding in California. These types of severe climate shocks cause disproportionate harm to people with low income and people of color, driven by inequitable housing and planning policies, underinvestment in resilient infrastructure and buildings, and barriers to accessing disaster recovery dollars. 

Insurance is one key tool for financial protection from the economic shocks resulting from disasters. However, despite a relatively robust insurance market in the US, many of the people most in need of financial resources to recover face a disaster insurance system that is inaccessible, unaffordable, and/or not designed for their needs.  

In a new report published this week in partnership with Ceres, we offer a roadmap for how local, state, and federal policymakers can improve the disaster insurance system to make it more inclusive.  

The Economic Burden of Climate-Driven Disasters 

Natural disasters create unexpected and widespread economic costs for households. In the short term, people face the immediate costs of evacuation, temporary housing, generators and fuel to deal with power outages, and direct damage to homes, personal items, and vehicles. In the long term, disasters can have a significant effect on economic well being, causing a loss of income or loss of a job when industry is disrupted, persistent increases in housing costs as housing stock suddenly declines, and permanent displacement and relocation. Without financial safety nets, the financial shocks of disasters can be tipping points into poverty and cause an increase in wealth inequality within a community.  

Millions of Americans face these costs each year. The Federal Reserve estimates that in 2021, one in six adults were directly affected by a natural disaster, and this will only increase as climate change makes extreme rainfall, wildfire, and hurricanes more frequent and severe. Studies consistently find that more than one in four American households could not pay for an unexpected expense of $2,000; this economic precarity is even more acute for Black and Hispanic households, where 35 – 40% of households report facing difficulties paying bills if faced with a small emergency expense.  

Households generally have four main sources of financial resources for disaster recovery: savings, loans, federal aid, and insurance. While the U.S. has more wealth to help in recovery compared to other countries, low-income households and people of color still face barriers to accessing all of these. On average, low-income, Black, and Hispanic households have lower cash savings and liquid assets to rely on for emergency expenses. Some households can make use of debt to finance recovery, such as federal Small Business Administration disaster loans, but research has shown that lower-income households face higher loan denials due to credit and debt-to-income requirements. Federal disaster aid, distributed through The Federal Emergency Management Agency (FEMA)’s Individual Assistance program, is not guaranteed, slow to distribute, and limited in quantity: from 2010 to 2022, FEMA provided grants to households in only 43% of major disaster declarations, and the average payment to impacted households was just $2,860 (Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap).  

Insurance can be a financial resilience tool that fills some of these gaps. Insurance payment distribution is faster, as it does not rely on lengthy bureaucratic processes. Research shows that households with insurance recover better and faster after a disaster. But disaster insurance remains unaffordable and inaccessible to many low-income households.  

The Challenge of the Disaster Insurance for Low-income Households 

Why are so many households locked out of the disaster insurance market? Our research identified three main drivers of exclusion: unaffordability, direct and indirect discrimination, and lack of coverage for unprofitable market segments.  

Natural disasters are inherently more challenging and expensive to insure. When a major storm or wildfire strikes, the losses across a community and group of policyholders are correlated, making it difficult for insurers to pool risk and cover costs over time. To do so, insurers must tap into large resources of capital (reinsurance, reserves, etc.), which makes disaster insurance expensive and less readily available. Advocates for frontline communities emphasize how low-income households simply cannot afford to purchase disaster insurance over other immediate costs, such as housing or auto payments.   

Some households face systematically higher insurance costs or lower payouts. Insurers base underwriting and pricing decisions on how likely it is they will need to make payments back to policyholders; while insurers are banned from using factors like race and income to set rates in most states, there are many aspects of the insurance contract that can indirectly lead to differential impact along race, class, and gender lines, such as the use of proxy variables and procedural barriers to negotiating claims. A handful of qualitative and quantitative studies have shown discriminatory outcomes in insurance prices, payment times, and payment amounts. 

On the supply side, it can be difficult for insurers to profitably offer products that are more widely affordable or that meet the needs of smaller market segments. There are also limited insurance products that address the many non-property losses that households incur. Insurers cite low profit margins and challenging regulatory environments for the lack of innovative or appropriate products that might address some of the needs low-income households and renters face. Because of this, there may be gaps in insurance that the private market cannot fill; providing affordable insurance to some households may require philanthropic support or public-private partnerships. 


Policies for Regulatory Reform and Market Innovation 

Given the increasing economic burden of climate-related disasters, systemic change is needed to ensure vulnerable households have tools for financial resilience. In our Inclusive Insurance report, we outline a suite of actions across sectors and scales that can be taken to create a disaster insurance system that is more affordable, accessible, transparent, people-centered, and just.  

With legislation and new programs, federal and state policymakers can take action to:  

  • Target financial resilience funding to households and communities who need it the most by subsidizing disaster insurance for low-income households to provide lower-cost coverage, or mandating that insurers provide fair underwriting and insurance offerings to disinvested communities through a Community Reinvestment Act for the insurance sector. Policymakers could also provide funding to communities in the form of community grants for insurance innovation, enabling them to design and test their own programs.   
  • Increase transparency and monitor the market by mandating data disclosures from insurers about the demographics they serve, such as in the Home Mortgage Disclosure Act (HMDA). This would enable researchers to better assess any disproportionate impacts in disaster insurance markets. 

Through regulatory reform, state insurance regulators can: 

  • Enable innovation in the insurance sector to meet the needs of underserved populations, by preemptively establishing regulatory frameworks for new insurance products like parametric or community insurance, or creating new regulatory sandboxes to enable insurers and regulators to test new products before scaling up.  
  • Provide more consumer protections and transparency to prevent differential treatment by reforming the claims contestation procedure to be more equitable and accessible and establishing complexity limits and coverage standards that give consumers the tools to better understand and compare insurance products. Regulators can also support research on the extent of direct and indirect discrimination in insurance markets, and the effectiveness of policies meant to address it.   

Through innovative programs, local government leaders can: 

  • Provide community-scale insurance support tailored to each context, such as insurance consultations for households to help individuals navigate the procedural barriers and find cost savings, and community-based insurance models where the local government serves as the aggregator for insurance purchase and distribution.  

Insurers and private sector leaders can:   

  • Expand product offerings to include innovative insurance products, such as parametric and microinsurance, that can be more affordable and serve households previously left out of the insurance market.  
  • Provide households tools for cost savings by increasing the transparency around the pricing of risk factors and offering opportunities for cost saving through risk mitigation that households can take advantage of, such as fortified roofs.  

Promising First Steps 

Already, local and federal leaders are taking action to better understand and fill the disaster insurance gap.  

Learn more about what state and local leaders can do to create a more inclusive insurance system in our report, Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

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How can the U.S. gas pipeline system support a path to net-zero GHG emissions by 2050?

An economist’s guide to filling in the research gaps.

Natural gas currently accounts for more than a third of U.S. energy-related CO2 emissions, but efforts to decarbonize the economy – in particular by replacing gas with electricity in a wide variety of critical applications – imply decreasing future gas demand and CO2 emissions from the industrial and building sectors as well as the power sector.

Resolving the economic and regulatory challenges that follow from this will require filling in crucial knowledge gaps about the U.S. gas transportation system – and how that market could be designed to support the energy transition.

An energy system already in transition

Transitioning the U.S. to a clean energy system is a critical step toward the long-term goal of reaching net-zero greenhouse gas emissions by 2050. The U.S. power system has already taken steps in the right direction. More electricity is coming from variable renewable energy sources (VREs) like solar and wind, while coal plants are being retired.

But even when we factor in options like energy storage, demand response and build out of electric transmission capacity, gas-fired generators will likely continue to have a role in the next decades by providing peak and ramping capacity at times when electricity production from wind and solar is low or electricity demand is high.

This, in turn, means that the country’s vast network of interstate gas pipelines has its own role to play in the US energy transition.

The problem is that the pipeline transportation market was built to support predictable, relatively constant demand (e.g. industry and buildings). It is not currently designed to accommodate the variability of demand from gas-fired power plants which can fluctuate significantly by the hour – or even more frequently. Nor is the pipeline system designed to be compatible with other low-carbon fuel options or phased down as electrification increases.

More economics research needed

To reconcile this disconnect, we need a much better understanding of how the pipeline market works, and how it could work. Compared to U.S. power markets, the interstate gas pipeline transportation market is characterized by opaque operations and practices and has not been studied much by economists. This has limited the economic analysis available to support decision-making by policy makers and stakeholders looking to address this problem.

More research and analysis is needed to inform how design, regulation and operation of the US gas transportation market can be improved, and the stranded asset risk and associated distributional impacts managed.

To stimulate and facilitate new research in this area important to the US energy transition, I recently published an introductory guide to the U.S. gas pipeline transportation market for researchers and energy market analysts. It outlines the main market features and regulations important for understanding the U.S. gas transportation market.

The objective is to facilitate further research that will help answer questions like:

  • Who is, or should be, shouldering the costs of gas transportation infrastructure and bearing the risk of some of these assets becoming stranded in a low-carbon-energy future? How should such long-term stranded asset risk be managed in the face of electrification and decarbonization?
  • What changes are needed in the gas transportation markets to provide more flexible gas delivery services to gas-fired generators that provide valuable balancing in the power markets?
  • What role can hydrogen play in U.S. decarbonization efforts? How could a potential hydrogen market be created and which parts of the gas pipeline network would be beneficial to make compatible with hydrogen transportation, given potential centers of hydrogen supply and demand.

By publishing this paper, we hope to inspire PhD students, researchers, consultancies and market analysts to conduct analyses on this topic crucially important to the U.S. energy transition. Such new research would ideally generate policy-relevant conclusions on how to reform the U.S. gas pipeline transportation market – and next be communicated to  energy market regulators and policy makers to support decision-making that will facilitate the US transition to net zero greenhouse gas emissions by 2050.

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