Climate Adaptation, Location Choice, and Regulation

The cost of natural disasters is climbing at an alarming rate. In 2024 alone, $2.4 billion in grants have been provided to disaster survivors in U.S. Estimates for the damage caused by Hurricane Milton suggest insured losses could reach up to $50 billion for Florida property owners. As extreme weather events become increasingly frequent and severe, development in vulnerable regions shows no signs of slowing. Public aid, while critical for recovery, inadvertently subsidizes development in high-risk regions, encouraging households to remain in vulnerable zones. In this light, it is not only critical to strengthen climate adaptation strategies but to reassess the heightened exposure to climate risks fueled by current land-use planning.

In the U.S., the “special flood hazard areas” (SFHAs) mark areas at high risk of flooding, where homes must be built with elevated foundations, and flood insurance is mandatory for homeowners with government-backed mortgages. Evidence shows that such regulation curb development rates in flood prone areas, being 9% lower than in unregulated zones. This demonstrates that regulations can effectively deter construction in high-risk areas. Additionally, these regulations reduce flood damage by an average of 55%, easing the burden on public disaster aid required after natural events. 

However, these regulations come with trade-offs. Developers face higher construction costs to comply with safety standards, such as elevating homes, and these costs are passed on to homeowners. This creates tension between the long-term benefits of flood protection and the immediate financial burden on property owners. Interestingly, despite the increased safety, property values in these regulated areas often remain unchanged, suggesting that homeowners may not fully value the reduced flood risk. This disconnect between public safety benefits and private costs highlights the challenge of aligning individual incentives with broader societal goals. More importantly, it shows that while regulations like the demarcation of high-risk areas effectively promote adaptation, they can also distort the housing market.

Discouraging development in high-risk areas is crucial for effective climate adaptation, and public policy plays a vital role in this effort. A successful example is the U.S. Coastal Barrier Resources System (CBRS), which eliminates federal incentives such as subsidized flood insurance and disaster relief for development in designated high-risk coastal zones. The impact is clear: development densities in CBRS areas are 83% lower than in comparable non-designated areas. By shifting the financial risk back to property owners, the absence of federal support leads to reduced development and fewer overall flood losses. 

Interestingly, while development within CBRS zones declines, neighboring areas often experience increased density and rising property values as demand shifts to safer land. This trend suggests that removing public incentives not only reduces the burden on public insurance programs but also boosts the property tax base in nearby, lower-risk areas. However, it also raises concerns about social and demographic impacts, as wealthier homeowners are better positioned to afford the costs of developing in CBRS zones, potentially deepening inequality in coastal regions. 

In Europe, the relocation of populations from high climate-related risk areas due to flooding or sea-level rise is becoming an increasingly important concern. Countries like Denmark and the UK have started implementing policies that facilitate the relocation of developments in vulnerable coastal and flood-prone areas. For example, Dorset County in the UK has introduced criteria to relocate developments at risk from coastal erosion and flooding. However, the success of these relocation policies depends on careful planning, transparent decision-making, and early engagement with affected communities to ensure fair and effective outcomes.

Relocation is often seen as a last resort, but as climate risks intensify, it is becoming a crucial component of long-term adaptation strategies. These policies can help prevent repeated disaster losses, but their implementation must carefully balance the social implications of moving entire communities and the economic consequences for local markets. 

As extreme weather events become more frequent and severe, the need for policies that align private incentives with social costs is more pressing than ever. While land development fuels economic growth, it also exacerbates environmental risks, particularly in areas vulnerable to natural disasters. Regulatory measures like floodplain designations and building standards are crucial for mitigating climate-related losses, but they come with increased costs for developers and homeowners.

Regulations that eliminate development incentives in high-risk areas, such as the Coastal Barrier Resources System (CBRS), present a promising alternative by encouraging a shift toward safer locations. By reducing reliance on public disaster aid and insurance, these policies help alleviate the financial burden on public funds while promoting more resilient land-use decisions.

Ultimately, the path to climate adaptation requires a multifaceted approach. Policymakers must balance enabling development with managing the long-term environmental and social costs of land-use decisions. A combination of regulation, market-based disincentives, and community engagement will be essential to ensuring that future growth is both sustainable and resilient in the face of climate change.

This blog is authored by Stefany Burbano, a PhD candidate at Mile-Finance and a fellow at De Nederlandsche Bank. Her research focuses on the intersection of extreme weather events and financial markets. She is currently working on projects related to the insurability of real estate in high climate-risk scenarios and the pricing of climate risk in corporate loans. Stefany is supervised by Prof. Mark Sanders (MILE) and Prof. Nils Kok (Finance).