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President Rob Kaplan

A Brief Discussion Regarding the Impact of Climate Change on Economic Conditions in the Eleventh District

Robert S. Kaplan

June 27, 2019

Based on the essay, “Economic Conditions and the Stance of Monetary Policy,” published on June 24, 2019.

Based on the essay, “Economic Conditions and the Stance of Monetary Policy,” published on June 24, 2019, found at https://www.dallasfed.org/news/speeches/kaplan/2019/rsk190624.aspx.

Overview

The Eleventh Federal Reserve District comprises Texas, northern Louisiana and southern New Mexico. Texas job growth in 2018 was approximately 2.3 percent, and we expect jobs to grow at a solid rate in 2019.

It is worth noting that the Eleventh District is particularly impacted by developments in the energy industry and international trade, as Texas is both the largest energy producer of any state and the nation’s largest exporter. It is also important to note that growth in Texas continues to be aided by the migration of people and firms to the state. This migration has helped bring human capital and new businesses to the state, which have helped fuel the diversification of industry and the development of its largest metropolitan areas: Houston, Dallas–Fort Worth, San Antonio and Austin.[1]

One factor we are increasingly discussing at the Dallas Fed is the impact of climate change on the Eleventh District. In particular, severe weather events can have a substantial human and economic cost to the district.

One recent example is Hurricane Harvey, which occurred in August 2017. It is estimated that Harvey caused approximately $74 billion in property damage and lost output in the state.[2] While the gross domestic product (GDP) and job losses appear to have been transitory, the lasting impact in Houston and along the Texas coast continues to be felt in the form of displacement of communities, ongoing rebuilding efforts, increased insurance costs, public spending on mitigation efforts, and more stringent building codes. In addition, the storm disproportionately impacted low-income families by wiping out their savings, impacting their ability to safely domicile their families and increasing their need for health care and related services.[3] Given the extent of the damage, a key question for civic leaders, businesses and residents is the extent to which severe weather events like Harvey are likely to be unusual and sporadic in the future or whether they are likely to become more frequent in the years ahead.

The Eleventh District is home to approximately 50 of the Fortune 500 companies. It is also a major infrastructure hub for the nation’s energy production, transmission and refining capability. The seaports along the Gulf Coast as well as the inland ports in our major metro areas and along the U.S.–Mexico border play a critical role for the U.S. in trade and immigration.

In this context, my Dallas Fed research team is focused on the extent that severe weather events such as hurricanes, droughts, flooding and tornadoes are increasingly likely to impact our people, cities, critical energy infrastructure and key industries. While our district has historically exhibited great resilience in response to the effects of severe weather, the latest National Climate Assessment, a comprehensive report on climate change and its impacts, indicates that the severity and damage caused by extreme weather events are likely to intensify in the years ahead. (See the appendix for a discussion of the National Climate Assessment findings and conclusions.)

The Impact of Climate Change: Frequency and Intensity of Severe Weather Events

Hurricane Activity

A hurricane is defined as a tropical storm with maximum sustained winds of at least 74 mph. Since 2000, approximately 20 hurricanes have impacted the Gulf of Mexico region of the U.S., comprising Texas, Louisiana, Mississippi, Alabama and Florida.[4] Over this period, 14 tropical storms passed through Texas, with six of these having sufficient maximum sustained winds to be categorized as hurricanes.

The National Climate Assessment asserts that the intensity of hurricane activity is likely to increase. This trend is likely to be associated with greater rainfall during these severe storms.[5] In addition, the report indicates that climate change is likely to cause global sea levels to rise an average of 1–4 feet during the remainder of the 21st century.[6] As a result of rises in sea level, it is probable that the risk of flooding on the western Gulf of Mexico coast will increase.[7]

These developments could impact economic conditions in the Eleventh Federal Reserve District and U.S. because of the impact on coastal infrastructure, which connects the nation to energy supplies as well as access to goods and services from overseas trade. In addition, as a result of these trends, the costs to repair damage to Gulf Coast facilities are expected to grow substantially.[8]

As discussed earlier, one recent example of the impact of severe storms is Hurricane Harvey, which made landfall on Aug. 25, 2017, in the area just north of Corpus Christi, Texas. As Harvey stalled over the Houston metro area, some areas recorded more than 50 inches of rain in a five-day period and experienced substantial flooding as local bayous, rivers and reservoirs overflowed their banks.[9] According to estimates by Moody’s Analytics, Hurricane Harvey had total direct costs of approximately $65 billion and indirect costs of approximately $8.5 billion.[10] Tragically, 68 people are estimated to have lost their lives as a direct result of the storm. More than 300,000 homes and businesses and approximately 500,000 cars were flooded.[11]

Harvey led to an estimated 16,000 lost jobs in the Texas Gulf Coast region—however, the Dallas Fed estimates that as of the end of 2017, employment on the Gulf Coast had more than fully recovered.[12] While increased economic activity was associated with reconstruction efforts, there are more lingering impacts including lost homes and businesses, increased insurance costs and costs of government programs to mitigate future damages.

As mentioned earlier, the Gulf Coast is home to a substantial concentration of refinery capacity, chemical industry infrastructure and offshore production facilities. At its peak, approximately 25 percent of the Gulf of Mexico’s offshore oil and natural gas production was shut in as a result of Harvey.[13] Refinery utilization along the Gulf Coast fell from in excess of 90 percent to approximately 60 percent.[14] More than 50 percent of U.S. output of basic petrochemicals was temporarily disrupted.[15] The refinery outages resulting from Harvey-related shutdowns led to a temporary increase in U.S. gasoline prices of 28 cents.[16]

In the aftermath of this storm, Gulf Coast cities as well as the state of Texas and various federal agencies have been working together to undertake multibillion-dollar investments to upgrade reservoir and flood mitigation infrastructure to better protect the region (residents and businesses) in the event of future weather events.

Impact on Water Supplies, Flooding and Agriculture

Climate change is expected to increase dryness in the Eleventh District as temperatures rise, as well as increase the frequency and intensity of heavy precipitation.[17] For the agriculture sector, this increased weather variability will naturally lead to increased agricultural production variability and risk. These trends may also lead to challenges relating to water availability in the state.

According to the U.S. Department of Agriculture, “drought is the leading driver of production risk in U.S. agriculture … [as it] can reduce crop yields, lead farmers to cut back planted or harvested acreage, reduce livestock productivity, and increase costs of production inputs such as animal feed or irrigation water.”[18] For the livestock sector—which accounts for more than 60 percent of agricultural production in Texas[19]—drought effects are often felt over multiple years due to the resulting pasture damage and herd reduction that take years to recover from.

In Texas, where farm employment makes up approximately 1.6 percent of employment, and farm output makes up approximately 0.4 percent of state GDP,[20] agricultural losses from the historic 2011 drought were estimated to be in excess of $7 billion, accounting for about 40 percent of the average value of agricultural production and far exceeding loss estimates from any prior drought on record.[21] Droughts also induce additional indirect effects from reduced agribusiness activity in drought years—fertilizer, crop storage, machinery—plus the decrease in expenditures in the local economy resulting from lost income for producers, harvest laborers, truck drivers and agribusinesses.

Heavy precipitation, which is expected to continue to increase in both frequency and intensity as climate change progresses,[22] also causes problems for agriculture, as seen this year in Texas and in other parts of the country. When flooding happens early in the season, fields become too wet for farmers to prepare the soil and plant crops, causing delays which lead to reduced yields or crop substitution. Flooding late in the season causes harvest delays and crop quality issues, which both hamper farm income. Hotter temperatures prompted by climate change also pose additional pest problems for farmers, driving up pesticide use and costs, and hamper livestock productivity—increasing time to grow animals to a given weight and decreasing calving rates and milk production.[23]

The inherent risks in the agriculture industry may be exacerbated by climate change, which could make it more difficult for agricultural producers to get sufficient financing and insurance. As crop yields become more variable, lenders may become more concerned about repayment of crop production loans and tighten their lending standards and terms. Also, insurance costs will go up as insurers have more indemnities to pay out from droughts or floods. Adaptations in the agricultural sector to mitigate the impact of drought cycles include planting more drought-resistant crops, increasing irrigation, and technological advances in water retention and irrigation application. In Texas, we may see a shift to more cotton acreage, as cotton can tolerate more heat than grain crops and has a wider time frame for planting and harvesting, which is beneficial in times of flooding.

Besides increased hurricane intensity and greater risk of drought, climate change may have additional impacts that could affect our district. Increased temperatures are likely to have an adverse effect on people’s health and quality of life.[24] They will likely lead to increased water evaporation and soil moisture deterioration, as well as aquifer drawdowns.[25] Increased ocean acidity and warming will affect aquatic life, impacting the commercial and recreational fishing industries along the Gulf Coast.[26]

Implications for the Dallas Fed

As a central banker, I do not delve into the political and other controversial aspects of this subject. However, I do intently focus on the ways severe weather events and climate-related trends are likely impacting economic conditions and financial stability in the Eleventh District and the nation.

It is the view of Dallas Fed economists that severe weather events pose a “tail risk” for certain cities and industries in our district.

It is the view of Dallas Fed economists that severe weather events pose a “tail risk” for certain cities and industries in our district. This is not new. However, while many of the impacts of these severe weather events have historically been transitory, we are increasingly cognizant of the longer-term risks that are leading several cities and companies to make substantial capital investments in improving infrastructure in order to mitigate the damage of future severe weather.

For now, it is the view of the Dallas Fed that severe weather-related tail risks are unlikely to materially negatively impact the medium-term economic performance of Texas and overall outlook for the region. However, if the National Climate Assessment predictions regarding the likely frequency and/or severity of extreme weather events turn out to be accurate, these extreme weather events may begin to have a negative impact on the region’s longer-term business prospects and migration trends.

Adaptation and Mitigation Efforts

Businesses, elected officials and civic leaders are taking a number of steps to manage these risks. State and local leaders are studying various infrastructure investments in order to upgrade the viability of neighborhoods, protect at-risk populations who lack the resources to recover from severe weather events, protect businesses, and ensure the ongoing production, transportation and transmission of energy services in the event of a severe weather-related disruption.

In addition, in our extensive discussions with energy industry contacts as well as broad business contacts, we are learning that businesses are investing much more heavily in alternative energy projects and sustainability initiatives. Energy companies are making substantial investments in moderating the environmental impacts of shale oil production. A number of energy companies and private equity firms are actively investing in battery storage and wind and solar projects that could diversify sources of energy in the U.S. In addition, Texas is now the largest wind-energy-producing state in the nation.[27] Many companies are adopting greenhouse-gas emissions targets and making investments to reduce their carbon footprint.

At the Dallas Fed, we are actively working to play a research and convening role throughout the Eleventh District to help frame these issues and discuss approaches that would improve the region’s ability to manage the effects of future severe weather events.[28] In addition, in order to improve our sustainability leadership and enhance our insight into these matters, the Dallas Fed has established a sustainability initiative intended to reduce our own greenhouse gas emissions and empower our employees to take actions which will improve the sustainability performance of our Bank.[29]

Conclusion

The purpose of this essay (including the appendix) has been to lay out key elements of the National Climate Assessment and discuss some of the potential implications of severe weather events for the Eleventh District. Dallas Fed economists will continue to carefully monitor and consider the impact of climate change on economic and financial conditions in the district and the nation.

APPENDIX

National Climate Assessment Findings and Conclusions

In 1989, President George H.W. Bush created the U.S. Global Change Research Program (USGCRP). It was more formally established by Congress in 1990 via the Global Change Research Act. The USGCRP was given the mandate to develop and coordinate “a comprehensive and integrated United States research program which will assist the Nation and the world to understand, assess, predict, and respond to human-induced and natural processes of global change.”[30]

The USGCRP is comprised of 13 federal agencies that conduct or use research on global change and its impact on society. These agencies include the Departments of Agriculture, Commerce, Defense, Energy, Health and Human Services, Interior, State and Transportation, as well as the Environmental Protection Agency, National Aeronautics and Space Administration, National Science Foundation, Smithsonian Institution and U.S. Agency for International Development.

Every four years, the USGCRP prepares an assessment, known as the National Climate Assessment (NCA). The NCA analyzes the effects of global change on the natural environment, agriculture, energy production and use, transportation, human health and biological diversity; and it describes current trends in global change and projects trends for the subsequent 25 to 100 years.

The most recent NCA was completed in November 2018 and was produced by a team of more than 300 experts, with input from external stakeholders. An expert external peer review of the report was performed by the National Academies of Sciences, Engineering and Medicine.[31]

The NCA concludes “that the evidence of human-caused climate change is overwhelming and continues to strengthen, that the impacts of climate change are intensifying across the country, and that climate-related threats to Americans’ physical, social, and economic well-being are rising.”[32] The report cites “significant, clear, and compelling evidence that global average temperature is much higher, and is rising more rapidly, than anything modern civilization has experienced, with widespread and growing impacts.”[33]

The report also explains that greenhouse gases absorb heat in the atmosphere near the Earth’s surface, preventing it from escaping out into space. If the atmospheric concentrations of these gases rise, the average temperature of the lower atmosphere will gradually increase as the heat emitted by Earth is retained inside the climate system, warming the planet, a phenomenon known as the greenhouse effect.[34] Greenhouse gases include, for example, carbon dioxide, water vapor and methane.

The report cites studies which estimate that the global average temperature rose approximately 1.8 degrees Fahrenheit between 1901 and 2016,[35] and that for the period since 1986, global annual average temperatures appear to have increased at a more rapid rate than for any similar 20–30-year time period in at least the last 1,700 years.[36]

The NCA states that “annual average temperatures in the United States are projected to continue to increase in the coming decades.”[37] The report indicates that recent record-setting temperatures are expected to become common in the near future. By late this century, the report estimates that in the U.S., increases of 2.3°–6.7°F are expected under a relatively optimistic climate change scenario and 5.4°–11.0°F under a more dire scenario, relative to 1986–2015.[38]

In addition to temperature rise, the report suggests that we are likely to see further increases in ocean temperature as well as progressive melting in glaciers and ice sheets, some shrinking in snow cover and sea ice, rising sea levels, and more frequent high temperature extremes and heavy precipitation events.[39],[40]

The NCA argues that heavy rainfall events are associated with climate change. The report explains that, due to the relationships between levels of temperature and humidity, the frequency and intensity of heavy rainfall events are expected to increase over the coming century. The report asserts that warmer temperatures lead to increasing evaporation rates. This trend is likely to cause higher levels of water vapor in the atmosphere, which is likely to lead to more frequent and intense precipitation extremes.[41]

The NCA indicates that climate change has contributed to increases in Atlantic hurricane activity since 1970.[42] It also asserts that hurricane rainfall and intensity are projected to increase as a result of rises in sea surface temperatures and changes in atmospheric conditions.[43] While the frequency of tropical storms is not expected to change, the number of more-severe storms—those with sustained wind speeds in excess of 130 mph (referred to as Category 4 and 5 hurricanes)—is expected to increase.[44]

The report warns that U.S. coastal infrastructure could be adversely impacted by this trend. This infrastructure provides critical energy supplies and access to goods and services from overseas trade.[45] The report further highlights that reliable and affordable energy supplies, which support broad sectors of the U.S. economy, are increasingly at risk from climate change and weather extremes.[46]

Across much of the U.S., climate change is also expected to decrease surface soil moisture due to increased evaporation rates associated with warmer temperatures. This means that future droughts in certain regions of the U.S. are likely to be stronger and potentially last longer. The NCA explains that when droughts occur simultaneously with especially warm temperatures, it creates conditions for substantial wildfires, which have increased in frequency across the western U.S. since the 1980s.[47] Droughts can also have a significant impact on agriculture.

For a fuller explanation of the NCA report, please see the link, National Climate Assessment.

Notes
  1. See “Gone to Texas: Migration Vital to Growth in the Lone Star State,” by Pia Orrenius, Alexander T. Abraham and Stephanie Gullo, Federal Reserve Bank of Dallas Southwest Economy, First Quarter, 2018. Also see “Texas Top-Ranked State for Firm Relocations,” by Anil Kumar and Alexander T. Abraham, Federal Reserve Bank of Dallas Southwest Economy, Fourth Quarter, 2018.
  2. Data are from Moody’s Analytics.
  3. See “Mental Health Services Still Needed at Houston Schools in Wake of Recent Storms,” by Rebecca Hazen, Houston Chronicle, May 20, 2019. Also see “Survey Finds Extensive Mental, Physical Health Impacts of Hurricane Harvey,” by Leah Binkovitz, The Kinder Institute, Rice University, Feb. 21, 2019, and “A Year After Hurricane Harvey, Houston’s Poorest Neighborhoods Are Slowest to Recover,” by Manny Fernandez, New York Times, Sept. 3, 2018.
  4. Data are from the National Oceanic and Atmospheric Administration (NOAA).
  5. Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States, David Reidmiller et al., eds., USGCRP, Washington, D.C.: U.S. Government Publishing Office, 2018, p. 74.
  6. See note 5, p. 996.
  7. See note 5, p. 996.
  8. See note 5, p. 47.
  9. Data are from the National Weather Service and NOAA.
  10. See note 2.
  11. See “National Hurricane Center Tropical Cyclone Report, Hurricane Harvey,” by Eric S. Blake and David A. Zelinsky, National Hurricane Center, May 9, 2018.
  12. Data are from the Bureau of Labor Statistics and Federal Reserve Bank of Dallas.
  13. Bureau of Safety and Environmental Enforcement, U.S. Department of the Interior press release, Aug. 26, 2017.
  14. Data are from the U.S. Energy Information Administration (EIA).
  15. See “Harvey Disrupts More than One-Third of U.S. Chemical Production,” by Jack Kaskey, Bloomberg, Aug. 28, 2017. Also see “Harvey Has Made the World’s Most Important Chemical a Rare Commodity,” by Jack Kaskey, Bloomberg Businessweek, Aug. 31, 2017.
  16. The gasoline price increase is calculated using the weekly average price across all formulations of gasoline between Aug. 28 and Sept. 4, 2017. Data are from the EIA with calculations by the Federal Reserve Bank of Dallas.
  17. See note 5, p. 1,004.
  18. See “Farmers Employ Strategies to Reduce Risk of Drought Damages,” by Steven Wallander, Elizabeth Marshall and Marcel Aillery, Amber Waves, U.S. Department of Agriculture (USDA), June 5, 2017.
  19. Livestock refers to animals and products. Data are from the USDA, 2017.
  20. Agriculture refers to farms. Data are from the Bureau of Economic Analysis, 2017.
  21. See “Updated 2011 Texas Agricultural Drought Losses Total $7.62 Billion,” by Blair Fannin, AgriLife Today, Texas A&M AgriLife, March 21, 2012.
  22. See note 5, p. 88.
  23. Much of the content of this paragraph and the following paragraph was informed by Federal Reserve Bank of Dallas discussions with contacts in the Eleventh District.
  24. See note 5, p. 989.
  25. See note 5, pp. 996, 1,001–03.
  26. See note 5, pp. 1,009–11.
  27. Data are from the EIA. Also see “Wind Power a Growing Force in Oil Country,” by Justin J. Lee and Kelvinder Virdi, Federal Reserve Bank of Dallas Southwest Economy, Second Quarter, 2017.
  28. The Federal Reserve Banks of Dallas and Kansas City are organizing a joint conference on Energy and the Economy: Markets in Transition on Oct. 17–18, 2019, which will address topics related to the energy transition and renewable energy. They are also planning the annual Federal Reserve System Energy Meeting, in which research on energy, commodities and environmental economics is shared within the System. As scientific committee members, Dallas Fed staff are in charge of selecting papers on climate change for the Workshop on Commodities and Macroeconomics of the Central Bank Research Association on Sept. 26–27 in Rome. The Dallas Fed’s Community Development function has prioritized disaster preparedness and recovery in its efforts to promote the economic resilience and mobility of underserved and lower-income neighborhoods. These efforts include several publications, which can be found here. Community Development has also hosted and presented at convenings of bankers and community organizations on the topic of inclusive disaster recovery across the Federal Reserve Eleventh District and the country.
  29. The Dallas Fed and its branches in Houston, San Antonio and El Paso are using more than 38 million kilowatt-hours of Texas wind power annually, which represents 100 percent of the Eleventh District’s total electric power needs. The district is the first in the Federal Reserve System to be 100 percent powered by wind energy. See “Dallas Fed Joins EPA’s Green Power Partnership,” Federal Reserve Bank of Dallas news release, April 3, 2019.
  30. See “GCRA Mandate” on the Global Change Research Act, U.S. Global Change Research Program (USGCRP).
  31. Review of the Draft Fourth National Climate Assessment, National Academies of Sciences, Engineering and Medicine, Washington, D.C.: National Academies Press, 2018, via Fourth National Climate Assessment, Volume II: Impacts, Risks, and Adaptation in the United States, David Reidmiller et al., eds., USGCRP, Washington, D.C.: U.S. Government Publishing Office, 2018.
  32. See note 5, p. 36.
  33. See note 5, p. 36.
  34. See note 5, p. 39.
  35. See note 5, p. 73.
  36. See Fourth National Climate Assessment, Volume I: Climate Science Special Report, by Donald J. Wuebbles et al., Washington, D.C.: U.S. Global Change Research Program, 2017, pp. 185–206 and 35–72. Also see “Continental-Scale Temperature Variability During the Past Two Millennia,” PAGES 2k Consortium project, Nature Geoscience, vol. 6, no. 5, 2013, pp. 339–46, via note 5, p. 76.
  37. See note 5, p. 42.
  38. See note 5, p. 43.
  39. See note 5, p. 76.
  40. See note 5, p. 37.
  41. See note 5, p. 88.
  42. See note 5, p. 74.
  43. See note 5, p. 74.
  44. See note 5, p. 97. Also see “Global Projections of Intense Tropical Cyclone Activity for the Late Twenty-First Century from Dynamical Downscaling of CMIP5/RCP4.5 Scenarios,” by Thomas R. Knutson, Joseph J. Sirutis and Ming Zhao, Journal of Climate, vol. 28, no. 18, 2015, pp. 7,203–224. For detail about how hurricanes are categorized, see Saffir-Simpson Hurricane Wind Scale.
  45. See note 5, p. 47.
  46. See note 5, p. 45.
  47. See note 5, p. 91.
About the Author

Robert S. Kaplan is president and CEO of the Federal Reserve Bank of Dallas.

From the Author

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

I would like to acknowledge the contributions of Tyler Atkinson, Alexander Chudik, Jackson Crawford, Jim Dolmas, Marc Giannoni, Stephanie Gullo, Evan Koenig, Emily Kerr, Anthony Murphy, Michael Morris, Demere O’Dell, Pia Orrenius, Keith Phillips, Laton Russell, Amro Shohoud, William Simmons, Martin Stuermer, Kathy Thacker, Joe Tracy, Mark Wynne, and Mine Yücel in preparing these remarks.

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