Burning Season: An Examination of U.S. Drought and Wildfire Risk
The Pacific Northwest is grappling with one of its worst wildfire seasons as fires—exacerbated by drought, extreme temperatures, and high winds—continue to rage across the region. California alone has seen over 8,136 fires ravage 3.75 million acres so far this year. This compares with 7,860 fires that destroyed 259,823 acres across the state in 2019. The 2020 wildfire season is notable not only for its widespread devastation or its timing during a pandemic, but also because some events are occurring in habitats that are not typically affected, such as across Joshua tree and Redwood forests in California. Climate experts warn that as climate change worsens, drought seasons are likely to grow longer, and wildfires more frequent, across some regions of the United States.
In this research report, Kroll Bond Rating Agency (KBRA) examines the relationship between drought and wildfire risk in the U.S., the cost of these types of natural disasters, and their implications (credit-related and otherwise) for state, local, and federal governments.
Wildfire and drought risk are on the rise in certain regions, particularly in the western U.S., as the impact of climate change becomes more severe.
KBRA believes the economic ramifications of rising climate change risks will become increasingly material to credit quality in high-risk areas.
We believe wildfire and drought risk have the potential to significantly undermine economic activity over the longer term, affecting population migration patterns, hindering access to essential services such as power, and limiting insurance capacity, among other concerns. The fires in California alone this year are estimated to have reduced U.S. GDP by an annualized 0.7 percentage points in the third quarter.
As environmental risks increase due to climate change, states and local governments that incorporate environmental risks such as wildfire and drought into their strategies and management processes will be viewed positively by KBRA.
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