Extreme Temperatures Hurt Low-Income Creditors, Cost of Canada's Climate Catastrophes, and More

New research delves into the effects of extreme temperatures on lower-income creditors, total insured losses for Canada’s climate disasters tick over CAD$3bn, the Federal Emergency Management Agency triples the size of its climate resilience loans program, New York’s Governor Hochul rolls out climate adaptation playbook, and the US Department of Energy looks to bolster energy infrastructure resilience in our Innovation of the Week.

Heatwaves and Cold Snaps Hurt Low-Income Creditors

Climate risk analysis often concerns itself with the stability of financial institutions and the health of economies writ large. The impacts wild weather has on the lower social strata are less of a focus, perhaps because their activities are of small consequence to the solvency of banks, insurers, and mega corporations.

That’s why new research from the Bank of Canada on the vulnerability of low- and middle-income households to extreme temperatures is so refreshing. It provides insight on how climate risks are already impacting swathes of the population in subtle, insidious ways that are often overlooked by the academic literature.

By analyzing payday loan data from across the US, the researchers paint a stark picture of climate stress on household finances. They found a surge in loan demand coinciding with extreme temperature days — both blistering heat and bitter cold. Repeated temperature extremes were also discovered to cause “sizable and significant deterioration of household financial health.”

There’s a few reasons credit conditions fluctuate in response to temperature extremes. One, intensely hot and cold days often lead to work stoppages and lost wages, forcing households to turn to payday lenders to make ends meet. Two, energy costs spike with extreme temperature shocks as households power up heating or cooling devices. Three, health care expenditures rise as heat- and cold-related illnesses soar.

The researchers found that payday inquiries increase on both extremely hot and extremely cold days. One standard deviation increase in the number of extreme heat or cold days per month leads to about a 0.4% bump in total inquiries relative to the baseline, they say.

However, credit effects are more pronounced for hot days. One extra day of extreme heat per month is associated with a 0.4% drop in credit issued, a 0.09 percentage point jump in delinquency rate, and a 0.1 percentage point increase in default rate. This suggests that lower-income households’ finances deteriorate under prolonged high temperatures, and that credit issuers know this and respond by reducing supply. 

Interestingly, the researchers did not see the same credit effects during extreme cold days. One reason is that cold snaps do not appear to crimp monthly incomes the same way that heat waves do. This means borrowers’ ability to repay is not impaired and lenders are more comfortable extending credit.

What are the implications of all this? Certainly, the findings should spark conversations among policymakers on crafting safeguards for those perched on the economic edge as temperature extremes increase in frequency and severity. 

This is particularly important given evidence that existing relief measures in the US aren’t helping as much as they could. The researchers explored how the Low-Income Home Energy Assistance Program (LIHEAP) affects credit outcomes at times of extreme temperature shocks, and found “no significant evidence” that eligibility changed credits, default, or delinquency rates.

This suggests new, better tailored programs are needed. The ideal would be policies that reduce households’ need for payday loans in the first place, or measures that enhance borrower creditworthiness following extreme weather shocks.

The findings also reveal that loan providers catering to lower-income households are already highly sensitive to how extreme weather can alter credit conditions and are responding accordingly. There may be lessons from these payday lenders that larger institutions could build on to bolster their climate risk preparedness as temperature extremes bite into the upper echelons of the economy.

Canada Pays Price for Year of Climate Disasters

Few western nations suffered climate-related disasters like Canada in 2023. The country wrestled with a record-breaking wildfire season that burned upwards of 45 million acres of land, and devastating floods that crippled Nova Scotia in July.

The economic toll of this year of terrors has now been tallied. Insured losses in Canada surpassed CAD$3bn for the second consecutive year, the Insurance Bureau of Canada reports. Last year’s tally was also the fourth-worst in Canada’s history.

Insured Damage for Severe Weather Events in 2023

The Bureau says Canada is now “a riskier place to insure”, meaning households and businesses could find it harder to afford — or even access — coverage for certain climate-related perils. This makes the need for effective climate adaptation strategies increasingly urgent, not least because the majority of the most expensive years for Canadian insurers, adjusted for inflation, have occurred in the past decade. In other words, costs have climbed as climate change has progressed, and are likely to surge higher if the warming trend is not halted.

Among the adaptation strategies recommended, homeowners are advised to maintain vegetation in wildfire-prone areas and to install anti-flood devices, like backwater valves or sump pumps. The Canadian Climate Institute has touted the economic benefits of such investments, estimating a return of CAD$13 to CAD$15 in avoided costs for every dollar spent on adaptation. 

As things stand, however, the Institute says Canada’s National Adaptation Strategy “remains unfocused and drastically underfunded”, leaving the country as a whole more vulnerable than it need be to future climate-related disasters.

FEMA Bulks up Resilience Funding

The US Federal Emergency Management Agency (FEMA) kicked off its “Year of Resilience” by tripling the size of its Safeguarding Tomorrow Revolving Loan Fund (RLF) program. This provides local governments with the capital to make low-interest loans that fortify communities against extreme heat waves, drought, wildfires, floods, hurricanes, and more.

The US$150mn allocation is targeted at-risk, underserved locales so they have the necessary resources to bounce back from the ravages of climate-related natural disasters. The loans are designed to reach into the heart of communities most in need and focus on projects that are not typically within reach under other programs. For example, the RLF is the sole FEMA grant that considers financing for extreme heat mitigation. 

Other eligible projects include those that reduce the impact of natural hazards, zoning and land use planning changes, and building code modernization. Loans may also be used by local governments to satisfy a local government’s non-federal cost-share requirement for other FEMA grant programs.

The RLF is a product of the Bipartisan Infrastructure Law, passed by Congress in 2021. US$500mn was made available over five years for the program. In the first year, FEMA allocated US$50mn. The significant ramp-up in financing this year reflects “the high level of interest in the first opportunity” and the growing hunger for adaptation funding from overstretched communities.

I’ll be curious to see what sorts of projects the RLF supports this year, and which areas of the US have the most appetite for the loans. The application process starts February 1 and closes April 30.

NY Governor Unpacks Adaptation Policies

Governor Hochul unfurled an ambitious resiliency plan for New York in last week’s ‘State of the State’. The package of measures is intended to strengthen the Empire State’s homes, communities, and critical infrastructure. 

The centerpiece ‘Resilient & Ready’ program provides funding to both post-storm repairs and preemptive flood defenses for lower-income homeowners. This dovetails with the new ‘Blue Buffers Voluntary Buyout Program’, designed to incentivize property buyouts in high flood risk areas. State purchased land will be used to restore shorelines and foster resilient habitats to serve as buffers against storm surges and high tides.

Hochul also ordered a shake-up of building codes to meet higher standards for extreme weather resistance, the deployment of flood barrier technology, and updates to Coastal Erosion Hazard Area (CEHA) maps. These initiatives should prepare the state and its citizens to withstand an erratic climate future. 

Hochul’s efforts signal to businesses and financial institutions how and where to invest their climate resilience dollars. The Governor has promised to write “a comprehensive adaptation and resiliency plan” for state entities, which will likely include proposals and strategies that private organizations could adopt for their own benefit. She also wants to build out public climate risk analysis tools, including “web-based drought prediction tools, urban heat island mapping and modeling resources” that could be leveraged by businesses to develop new adaptation products and services.  

In addition, Hochul pledged to release the climate projections from the New York State Climate Impacts Assessment, which should show in detail how climate change is impacting communities, ecosystems, and industries. This wealth of data should enhance climate responses up and down the Empire State.

💡Innovation of the Week💡

US energy infrastructure is far from climate proof. American utilities had a torrid 2023, from Hawaiian Electric, currently being sued for the Maui wildfires, to ConEdison, which wrestled with floods and high winds throughout New York State in December.

Stock performances reflected the bad news. The Dow Jones Utility Average Index ended 2023 8% lower than it started the year, and 16% down from its three-year peak in April 2022.

Utilities’ struggles are not only of concern to investors. They’re a problem for the federal government, too. It’s one the Department of Energy (DoE) is eager to solve. At the start of the year, the DoE announced a US$70mn competitive funding initiative to support energy infrastructure resilience.

The All-Hazards Energy Resilience Funding Opportunity will bankroll efforts to buttress the US grid, electric utilities, pipelines, and renewable energy assets. Funding is open to public and private entities, as well as universities and DoE’s own National Laboratories.

The Department has set broad parameters for applicants seeking funding, in the interests of supporting a diverse range of resilience-building initiatives. Around 25 projects are expected to receive funding in total. On the climate front, the DoE has indicated interest in innovations that reduce climate impacts on energy transmission and reliability, and those which can harden infrastructure against wildfires.

Funding awards are scheduled to be announced in September this year. Adaptation startups, entrepreneurs, and established companies alike should jump on the opportunity. The money’s good, but even better from a commercial perspective is the DoE’s de facto seal of approval if your project is selected.

Time to get writing those proposals!