Australia has experienced higher temperatures and rising sea levels in recent years, with floods and bushfires being the most common disasters in the country.1 In February and March 2022, severe storms and flooding devastated both southeast Queensland and coastal New South Wales. By May 2022, the total incurred claims cost from this event was more than $3.35 billion,2 following the destruction to personal property and infrastructure and loss of life. Victoria has also been adversely affected by recent weather-related disasters – bushfires in 2019–20 damaged more than 1.5 million hectares of land in eastern Victoria.3
Natural disasters can cause enormous financial and personal loss, including loss of homes, damage to property, loss of livestock and farm produce as well as personal trauma and loss of life. Not surprisingly, the tangible costs of natural disasters are more easily accounted for than the intangible and hidden costs. Many costings therefore tend to underestimate the value of the total loss, reflecting that some of the costs are unobserved. For example, Wittwer et al. (2021) estimates that the direct cost of the 2019–20 bushfires on the Victorian economy was 0.1 per cent of gross state product, but this estimate does not account for the broader costs relating to the environment and people’s health and wellbeing.
The extent to which this value underestimates the true total cost is unknown; what is known is that the personal trauma and other intangible costs borne by the affected population are significant and can reduce economic returns in the region (Baryshnikova and Pham 2019).
In this paper, we aim to provide a more holistic approach to the costing of natural disasters by applying a life satisfaction approach. This approach circumvents the drawbacks of conventional approaches by using individual subjective wellbeing (SWB) to proxy for utility and using the link between SWB and income to derive costs. We contribute to the literature in three ways. First, our paper is among the first to use people’s life satisfaction responses to value the impact of natural disasters in Australia. While Carroll et al. (2009) and Frijter et al. (2011) employ a similar approach to estimate the costs of extreme events in Australia, their studies cover shorter periods (three and five years respectively) and are restricted to specific geographic locations. In this study, we use a significantly longer period (2009 to 2019) and look at all Australian states to provide more recent and comprehensive cost estimates of natural disasters.
Secondly, our analysis uses longitudinal data and panel techniques to overcome several data and methodological issues found in previous studies. One limitation from past studies is the need to draw data from two separate sources to define disaster experience. For example, Carroll et al. (2009) merges postcode information from the Australian Bureau of Meteorology and the Australian Centre on Quality of Life to obtain a disaster experience variable. Doing so introduces the risk of misidentifying information, since it cannot be confirmed whether an individual living in the region has been directly affected by the extreme weather condition. Instead, we use population representative longitudinal data from Australia, which provides more detailed information on an individual’s experience of natural disasters and records people’s self-reported life satisfaction. Furthermore, the survey asks individuals to identify damage experienced from any type of weather-related disasters in the past 12 months, which allows us to estimate the year-to-year effect of natural disasters.
Thirdly, we compare the effect of natural disasters on the life satisfaction of women and men and homeowners and non-homeowners. Our results highlight the importance of targeting policies towards different cohorts to better mitigate the impact of natural disasters. We hope to provide greater clarification on the direction of effects given the inconclusive and contrasting results in the economic literature (see for instance Kimball et al. 2006 and Yamamura 2012).4
The remainder of the paper is organised as follows: Section 2 discusses the use of SWB as a proxy for utility to value the cost of natural disasters, Section 3 introduces the empirical methodology and describes the data, Section 4 discusses regression results and quantifies the costs of natural disasters and Section 5 concludes.
Footnotes
[1] State of Climate 2020(opens in a new window), CSIRO and the Bureau of Meteorology.
[2] Insurance Council of Australia (2022). Climate change impact series: Flooding and future risks.
[3] 2019–20 Eastern Victorian bushfires.
[4] Kimball et al. (2006) finds that the severe damage from Hurricane Katrina significantly reduced affected people’s happiness. In contrast, Yamamura (2012) finds that surviving the Kobe earthquake had a long-lasting positive effect on a survivor’s subjective wellbeing. The author owes this peculiar result to survivors feeling more fortunate following the deaths of their neighbours, lowering their aspiration levels.
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