Pricing wildfire risk into municipal bonds

Published

April 2023

The insight

Wildfires pose a significant risk to human life and property in California. In 2018 alone, wildfires killed 100 people and burned almost 2 million acres.1 The Camp Fire in November 2018 was the single deadliest in California’s history, destroying the town of Paradise and killing 85 people.2 The total economic damage associated with wildfires in 2018 was estimated to be $148 billion, about 1.5% of California’s annual gross domestic product.3 Almost two-thirds of these estimated losses were indirect—in other words, losses due to supply chain disruptions caused by the wildfires—and affected other locations far from the fires themselves. Health costs relating to air pollution were estimated to be over $32 billion.4 Unfortunately, wildfire-driven economic losses are likely to increase in the future, as the size and frequency of wildfires increase due to longer and more severe drought conditions. At the same time, population growth and development in high-risk regions have also increased overall exposure across the state.5

Wildfire damage has already had direct impacts on the municipal bond market. After Pacific Gas and Electric’s equipment was found to have caused a series of wildfires (1,500 of them6) during a period of drought in California—including the Camp Fire that destroyed Paradise—the utility filed for bankruptcy, an action that affected over $900 million in outstanding municipal debt.7 At the time, a writer for the Wall Street Journal labelled it the “The First Climate-Change Bankruptcy.”8

The tools that power this visualization

ICE collaborated with the United States Forest Service to model probabilistic and climate-conditioned wildfire risk across the United States. The model includes projections for two different Intergovernmental Panel on Climate Change Representative Concentration Pathways (RCPs): RCP 8.5 Scenario, often referred to as the “business-as-usual” future emissions trajectory, and RCP 4.5, a more moderate emissions pathway, out to 2060. ICE uses these models to calculate Value-at-Risk metrics—estimates of the annual average percentage of property value that will have to be replaced—and these metrics are incorporated into the ICE Wildfire Score, an easy-to-interpret and geographically targeted assessment score between 0.0-5.0 that quantifies the relative total wildfire-related financial risk to issuers and municipalities across the country. For example, according to ICE’s analysis, San Jacinto, California—a city of about 47,000 in Southern California —has a Wildfire Score of 4.8, and over 35% of property value in the city is at risk from wildfires by 2040.

1 2018 Incident Archive, CAL FIRE, State of California.

2 Hagerty, C. (Oct. 23, 2019). The Survivors, Vox.

3 Wang, D., Guan, D., Zhu, S., Mac Kinnon, M., Geng, G., Zhang, Q., Zheng, H., Lie, T., Shao, S., Gong, P., & Davis, S. (2021). Economic footprint of California wildfires in 2018. Nature Sustainability, 4, 252–260

4 Wang et al. (2021)

5 Radeloff, V.C., Helmers, D.P., Kramer, H.A., Mockrin, M.H., Alexandre, P.M., Bar-Massada, A., Butsic, V., Hawbaker, T.J., Martinuzzi, S., Syphard, A.D. & Stewart, S.I. (2018). Rapid growth of the US wildland-urban interface raises wildfire risk. Proceedings of the National Academy of Sciences, 115(13), 3314-3319

6 Gold, R., Blunt, K., Smith, R. (2019). PG&E Sparked at Least 1,500 California Fires. Now the Utility Faces Collapse, The Wall Street Journal.

7 Slavin, R. (2022), Climate change, hurricanes, and their toll on municipal credit, The Bond Buyer.

8 Gold, R. (Jan 18, 2016). PG&E: The First Climate-Change Bankruptcy, Probably Not the Last. The Wall Street Journal.