When the storms strike: balancing social costs with private interests

Opinion: We are going to endure the impacts of Cyclone Gabrielle for years to come. And we can take no comfort from the probabilities reported in the news.

As we have witnessed, a one-in-100-year extreme rainfall event can occur any day, and such an event can follow again the next day or a week later.

Climate scientists expect the frequency of extreme weather to increase in the future, and as with earthquakes, community funding should support the recovery of those impacted by extreme weather and flooding. This is a role for central government.

Two immediate challenges deserve attention – forestry and land use planning.

First, what are the social costs associated with forestry land use?

As a young boy growing up in Tairāwhiti Gisborne, I spent many enjoyable hours surfing and swimming at Waikanae beach. Now it is littered with forestry slash, which raises the question – what are the social costs of forestry?

Private landowners – some overseas – derive benefit from the carbon sequestered while their trees are growing and the sale of logs harvested. Yes, forestry provides employment, workers are compensated, transport is paid for, and forest owners receive the dividend associated with the sale of their product.

But the costs related to the external impacts of forest recovery and transport are not covered.

Who picks up the cost of damage to the roading network? Yes, transport contributes to a government roading fund, some of which is available for maintenance and repairs to community networks. More significantly, who pays for the uncompensated damage associated with forestry slash to bridges, beaches, private property, etc. Private property owners and the community, one way or another.

Alternatively, should forest landowners be held liable for the damages to property and the environment? Would this create an incentive for improving forest land management?

I'm not arguing against forestry; simply suggesting that the actual cost of forestry needs to be carefully considered going forward, particularly when framing policy to address external costs – a job for government agencies.

Second, numerous reports suggest removing communities from flood-prone areas and introducing restrictions on construction in flood-prone places. Our research into the property market suggests that buyers pay a premium on location, particularly close to the coast, for the northerly aspect and views – hardly surprising.

Data also show that the market discounts properties located in a flood plain. Nowadays, information on flood-prone areas is readily available.

Shouldn't it be incumbent on buyers to take due care when considering buying a house? Surely caveat emptor – let the buyer beware – should prevail.

If a landowner is entitled to build on a site exposed to natural hazards – sand dunes or cliff tops for example – then they should face the costs of erecting barriers and retaining walls, not the public.

Commentators have raised the topic of moral hazard. Simply stated, my level of care for and maintenance of my house falls away when I buy insurance against extreme weather. Such is human behaviour.

However, moral hazard can also exist on the other side of the market. For example, local councils might adopt less stringent rules in response to local pressure, expecting that central government will come in and pick up the tab.

Shifting responsibility onto local and central government dilutes the private incentive to take care and further advances the coddling of society.

Policy aimed at creating incentives for private landowners to make the right decisions for their circumstances, while ensuring that they meet the costs associated with those decisions, could result in them determining that managed retreat is their best option.

Low-income families in flood-prone areas who don't have the ability to carry such costs will need assistance to adapt to the increased risks from the weather, and recovering from storms; and looking ahead, planning and investment in social housing will need to carefully account for those costs.

But I remain unconvinced about managed retreat if this is to be decreed and offers homeowners a chance to shift their costs elsewhere. The future flood recovery should be adaptive: by incentivising private property owners to do the right thing and meet the fair costs; and, where necessary, assisting low-income households.

Basil Sharp is emeritus professor of economics and former director of the Energy Centre at the University of Auckland Business School. The views in this opinion piece are his own.