Sea level rise and the social cost of flood insurance subsidies
Niko Jaakkola  1, *@  , Terrence Iverson  2@  
1 : Ifo Institut
2 : Colorado State University
* : Auteur correspondant

We consider the interaction between sea level rise due to climate change and imperfect flood insurance subsidies in an analytically tractable model with forward-looking investment decisions. Using the vulnerable Tampa Bay area to calibrate the model, we demonstrate that subsidised flood insurance leads to large social costs, driven by excessive development in flood-prone coastal areas. We then consider optimal adaptation in terms of forward-looking urban planning. With actuarially fair insurance, sea level rise leads to cities gradually retreating uphill from the coast, with areas proximate to the encroaching shoreline progressively abandoned.

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