Preparing for the Costs of Extreme Weather in Canadian Cities: Issues, Tools, Ideas

Abstract

This paper reviews the risks to Canadian municipal finance from extreme weather and analyzes the financial tools that cities can use to prepare for extreme weather events: insurance, weather reserves, weather derivatives, and budget provision. Despite the threat of climate change, Canadian cities are not substantially increasing their use of these tools. However, improvements could be made to accounting procedures and disaster assistance regulations, and amalgamating smaller cities could improve their ability to manage risk, all of which will ameliorate the financial impacts of extreme weather. The paper proposes reasons why Canadian cities have failed to fully adapt their infrastructure to extreme weather: lack of information, low fiscal capacity, externalities, moral hazard in disaster assistance arrangements, and poor program design. It concludes by discussing how these arrangements may be overhauled to better prepare Canadian municipalities for extreme weather, including new provincial legislation and the creation of a federal infrastructure fund modelled on the United States’ Pre-Disaster Mitigation program.