Pushkin from Pushkin Industries. This is deep background. I'm Noah Feldman. Last month, we all saw the devastating images from Texas. Plunging temperatures and two severe winter storms in quick succession led to a breakdown of the state's energy grid. More than four and a half million homes and businesses were left without power. Not only that, water service was disrupted for more than twelve million people because of pipes freezing and bursting. It was an unprecedented failure of the state's infrastructure. This disaster in Texas was a wake up call for places all across the country. Our infrastructure is consistently and concerningly outdated. It often was not built to withstand extreme climate conditions of the kind we're seeing more of era of climate change. We don't seem to be prepared for more frequent and severe storms. Without a serious overhaul in the coming years, our electric grid, our water, and our sewage systems have the capacity to fail again, and to fail massively. Here to help us get behind the story of what really happened in Texas and what we can do about it going forward is Alice Hill. Alice is one of the country's leading experts on climate resilient infrastructure. She's now a Senior Fellow for Energy in the Environment at the Council on Foreign Relations, but before that, she was Special Assistant to President Obama and Senior Director for Resilience in the White House. She led the national policy regarding preparing for the impact of climate change. In that role, Alice, I'm very grateful to you for joining us. Welcome to deep background, Alice. I wonder if we could start with you walking us through what you see as the true root causes of the disaster that we saw in Texas, because there, you know, there are many opinions out there about quote unquote what really went wrong, So maybe just start with the temperature anomaly and what its immediate consequences were. Well, I'll have to start with the statement of temperature anomaly. I guess it depends on how far back you want to go, but certainly these temperatures were not an unprecedented event for Texas. Forty years ago, they had a similar event of at least as long duration and as least as cold temperatures. So if you want to drill down on what's an issue here, it's a choice not to invest in preparedness. You choose not to prepare your grid or extreme events, You're going to line that those extreme events can do heavy damage, and once your electric grid fails, it just cascades through all the other infrastructure sectors, causing widespread damage. And with climate change, we have an added twist the extremes that we will experience in the future that are fueled by warmer temperatures global average warmer temperatures will exceed the extremes in the past. So if Texas had done its job, it would have been if the utilities had done their job, they would have been prepared for a cold snap like what they just saw. But going forward, they also need to prepare for what will be unfamiliar events, events that have never occurred in recorded human history, and that will take perseverance and additionally money. We'll dive into that, but I think what you said is already really fascinating. If something was just a one in forty year probability, would you already have thought that If something is a one in forty year probability, let's say that an expenditure should be made to prevent that from having disastrous side consequences. What metric would you have used of costs and benefits. If someone had said, yeah, well it gets this cold in Texas every forty years, Well you need to do a cost benefit analysis of what are the costs of reinforcing your grid, and then what are the potential costs that you will suffer when that grid fails. We're hearing that it could be upwards of ninety billion dollars worth of damage, thirty lives lost, and there may be other consequences that are never included in that tallly. So, in terms of looking ahead, if you just take the basic cost benefit analysis that the federal government has provided across the board, if we spend one dollar now in for example, hardening our grid to extreme weather, we save six dollars in recovery costs. Now, there's a reason why electric grids don't want to invest in that, because it costs more money and that will increase rates and then you might have your rate payers upset. However, who ultimately bears the cost when the whole system collapses, And in this case, there'll be many people bearing the cost, but ultimately it could also be the federal taxpayers who have had nothing to do with the calamity that befell Texas. I do want to talk about bearing the costs, because I think it's vastly important. Is the one dollar spent save six dollars later a national statistic or is it one that could have been applied concretely in Texas? I mean, I guess what I'm wondering is how much would it have cost Texas to harden its infrastructure grid against cold Whether they're by saving the ninety billion dollars, Is it one sixth of that or is it a larger percentage. I think it's a lower percentage. The figure that I read is sixteen billion. We will get a lot greater granularity going forward on this. The vulnerabilities the electric grid in the face of climate change are huge. The costs are significant to harden the grid against those costs. But because our electric grid is central to human existence at this point in a developed nation like the United States, if we lose our grid in an extreme event, we will have enormous costs. It's not as if this hasn't happened before. It happened with Hurricane Sandy, and in that instance it was a very strong storm, but it was the fact that New York had neglected to include in its planning that lower Manhattan had suffered about a foot of sea level rise, and because they failed to include that in their planning, when the storm search came in the water, the storm surge at wall of water that comes in front of a storm quickly overcame the flood berriers that Manhattan had built. Those were built to assuming a maximum of twelve feet, came in close to fourteen feet. The water immediately poured in, a substation exploded, and the city that Never sleeps plunged into darkness. Eight million people along the Northeast corrid or lost power, and huge downstream failures of transportation, healthcare, communications, And that was a sixty billion dollar event as well. Now, in response, con Edison, after some pressure, has really emerged as a leader in hardening its grid to future events. Also, I'm really fascinated by the Sandy comparison for the following reason. Part of the narrative about what went wrong in Texas is about out a deregulatory environment in a state that believes in deregulation, right, a state that like Texas, self consciously separated its grid from the grids of other states in part, at least, as I've read, to avoid being subject to certain kinds of federal regulation, and so we sort of think to ourselves, Oh, Texans don't want to be regulated. But you're describing that events of comparable consequence and of comparable error were made in New York, which is not characterized by that kind of deregulatory impulse. So I'm wondering were the motives in the Sandy case for the failure to harden the grid similar to identical to the motives in Texas, namely that, as you said, nobody wants to spend money right now to save money sometime in the future unless they're obligated to do so. I think that's the largest challenge, is that everyone's trying to run a lean machine at low costs. But I would just point out it's not just Texas or New York. Look at California. We have utilities that have underinvested in preparation for the wildfires. The wildfires have been worsened by climate change. Going forward, you have to ask how does the world's strongest economy function when it's grid is not up to even historical risks, much less the future risks that climate change will bring or is already bringing these new extremes that have never been experienced. There was just a study issued today by one of the major consultancies, ICF estimating that there's at least five hundred billion dollars worth of work that needs to be done on the electric grid to harden it to the kinds of extremes that we will be experiencing to get ourselves prepared for climate change. I'm genuinely fascinated by this, by what you're saying, and I'm also really surprised by it. So right away, there's a takeaway here that I didn't anticipate. And if I can say it and tell me if I'm getting it right. You know, the social psychologists and the behavioral economists have taught us that we as humans are really bad at calculating improbable but very bad future events. Also in probably very good future events, we hyperbolically discount, and we do it very badly. And if I'm hearing you right, the failure to invest sufficiently in hardening infrastructure against climate extremes seems to be more caused by that human tendency that's universal. Doesn't matter what your politics are, doesn't matter where you stand on regulation, because as you say it, exists in New York. It existed in New York, although it's better now. It exists in California still, and it exists in Texas. And so from that perspective of the version of the story that's been circulating in I guess it would be fair to say liberal elite circles that tends to blame Texas distinctively is kind of misplaced. You know, I mean, Texas got it wrong, and that's not good. But California also got it wrong, and in the past, New York got it wrong. And that's because we're all humans, not because some of us have one view of regulation and some of us have a different view of regulation. Well, I would say that what's difficult with climate change is that because we are risk is humans, based on our own experience, the availability bias, we tend to think that the last extreme is the very worst thing that could happen. When someone says, you know, I've lived here for fifty years and this has never happened before, it's just unprecedented. That's understandable, but it's not really particularly newsworthy because with climate change, we are going to be seeing successively worse events, and so the challenge is what level of preparation do you need. In Texas' case, they didn't invest in preparing for past extremes. In California's and in New York's it was future extremes that had then materialized, so it was planning from based on historical path. In Texas' case, they actually had had this experience. In California case, they've had a lot more development in these areas wildland urban interface that put more people in places where fire occurs, and then there's more ignitions and can be more flammable materials accumulating, and a lot of other complex factors. But in Texas, there was a choice not to prepare for an event that had occurred forty years ago and an event they had a cold snap in twenty eleven that they didn't choose to change how they did business after that. With regulation, you might see improvement on that, and that's what we've seen with con Edison. Regulation or agreement by the company in the course of being regulated has led to improvement. Am I right in interpreting what I've read to suggest that Texas wasn't subject to federal regulation here by virtue of the way that it chose to keep its grid separate from adjoining grids. Yes, it consciously said we don't want to have to deal with the fits, so we're going to keep all our generation within our state, essentially, and had increased its vulnerability because when you're having trouble in one area, of classic solution is to ask somebody else nearby to lend a helping hand, and that could be in the utility in another state that could send transmit some power to you. But Texas had basically made a decision that it wanted to be an island and to itself, which increased its vulnerability. Would you think that a good solution for this is that federal law should be changed so that states can, assuming it's possible, which maybe it isn't, so that states can't really opt out. I mean, under the constitution, Congress would certainly have the power to regulate state power grids even if they were separate from other states, because the power grade in a state like Texas affects the interstate economy, even if they're not literally physically connected to the grids from other states. So that's just a policy choice by Congress to run the regulatory system this way. I mean ought that to be different, so that all states, no matter where they are, no matter what choices they make, are subject to federal regulation. Well, you've raised essential point when it comes to climate change, because under our current system, the federal government largely differs on these decisions to state and local authorities, and that includes regulation of land use, regulation of building codes. And what we get is a patchwork across the United States, and in the area of building codes, all of our building codes at this point only look to historic past. We don't yet even have model that really look to the future. But even with our history model codes that look to protect us from extremes of the past, more than fifty percent of the states don't even bother to adopt those codes, including states that are in the path of frequent extreme events. So that is just a decision that we've said constitutionally, we're going to let the state and locals make this decision. But this collides with the expectation that has now grown among Americans that when things go wrong, the federal government's going to bail us out. So you saw Texas said, oh, look this is terrible, we need help federal government, And we see that all the time. And we've also seen a paradigm that shifted from Eisenhower's time, when basically before Eisenhower, local communities were told, yeah, you get to make your choices locally about what you do, but you also are going to take care of the disaster. We're just we'll send you help with the Red Cross. At the federal government, we're not in the disaster recovering business. But that changed with Dwight Eisenhower. And from a very modest like I think it was about five hundred thousand dollars or something under Dwight Eisenhower, it's now the federal government typically pays seventy percent, sometimes ninety percent, and often one hundred percent of disaster recovery in these big events. So you've got state and locals making choices about how they want to live, and those choices often involve significant risk. Living in floodplains, living in areas prone to fire, and building codes that are not floodproof or fireproof. Bad things happen, huge losses, and then Congress says, oh, yes, we need a bailout. Saint Paulson who called these climate bailouts, and he astutely observed that it will be very hard to turn off the spick it on climate bailouts. And that's why it's so important to encourage local communities and states to invest in risk production so we get take advantage of this one to six ratio. You're really describing a tremendous moral hazard problem. I mean, it's polite of you to say that we should encourage the states, but the truth is, if the states can spend less and then be bailed out by the whole country, by the taxpayers of the whole country, their incentive is precisely to underinvest. I mean, that's you know, it sounds like you're making a case for requiring the states to invest in hardening infrastructure, not a case for encouraging it. I mean, you're being polite, but it sounds like, given the incentives you're describing, if you and I and the tax payers everywhere else in the country are going to be paying for it, we should be upfront demanding that and requiring as a matter of law that individual states invest enough that they don't have to be bailed out. Well, I agree with that policy, but it turns out it's very difficult to gain the political will to implement such policy. In the Obama administration, there was an idea of a disaster deductible. So essentially, if states would invest more in pre disaster reduction of risk, better building codes, better land use practices, better investments in their electric grid, when the disaster hit, the federal government would pay more a higher percentage to that state of their losses in recognition that they'd already spent money in risk production. And those who chose like Texas, which has not historically had strong building codes or land use practices or electric grid requirements, you would say under that scenario, well, you chose not to because you wanted to keep your tax base a high and you wanted to attract all this investment, but you didn't want to have the higher prices of the homes in the land develop use issues. So you will pay more in post disaster. You're going to pick up more of the tab that it got all the way to comment under Obama in the rags, it was very quiet. Under Trump, I think it will be difficult. The politics of it are so difficult. We do have one example where we have successfully done this as a nation, at least one and that is on our barrier islands. We have passed the Coastal Barrier Act in the sixties that essentially said, in those areas, we're not going to give any more federal money to development in those areas, and if a disaster occurs, you're on your own. So we essentially said the federal government's interest, it's just those areas are too vulnerable. The local communities can go ahead and do it, but we're not going to be supporting it, and that has held. We'll be right back. Let's talk a little more about where the costs of this disaster have already fallen. One of the issues that's gotten the most attention is that some individuals and also some energy businesses basically had versions of contracts where they would get a lower price of service for the ordinary days in exchange for the idea that when costs went up, they would pay some proportion of the wholesale costs of energy, which is, in principle, was supposed to be a fair contract. Right, I get a lower price when the price is low, and then I pay a higher price when the price is high. Then, for a brief time, some number of days during the disaster, when electricity went offline, the price of power skyrocket to an enormous set of prices enough that it could bankrupt ordinary people with some enormous power bills. Are contracts like that just flat out irrational? Should we not be allowing those kind of contracts at all because of the fact that at the extreme they have these effects, or are those contracts that actually would be morally justifiable provided that they're actually carried through, you know, provided that you save money when you save it, and then when you when it costs a lot of money, you have to pay the money. Well, I think this is a point where the market collides with people's expectations. And yes, the Harvard professor who helped construct the Texas system said the system was working as it was supposed to when when their resources scarce, the price is supposed to go go up. But we're talking about ordinary humans at the other end of this, and sometimes it's the utilities, but sometimes it's going to be the individuals who were just shopping around for a cheap break. And we're not investigating what would happen if there's a forty year event that shuts down the entire group in Texas and they have trouble generating power that's just beyond the average consumer. And I think it's naive for us to expect the average consumer would in fact investigate that. So that's why it's shocking when we hear these numbers. No one contemplated it when they were entering it, certainly as an ordinary investor and probably even sophisticated investors. Because of the availability bias and our optimism bias, we think these bad things won't happen. We never really pencil it out how bad it could be and that it could drive us into bankruptcy. But when we're dealing with extreme events, I think regulation is appropriate because they're not ordinary events. There are events that are not in the ordinary course of business. So just as we need insurance for in case we have a terrible car accident, we want insurance on our best and most important assets, our home. We need to find ways to provide insurance but also regulate this market. For me, it's a bit of an analogy of these building codes. Building codes have been around for thousands of years. People have recognized for a long time that it's too hard for the purchaser to figure out whether their house is sound or not. We need building codes to help us make those judgments, and that's where regulation can help drive better outcomes. I think regulation of the electricity grid, for in terms of hardening and in terms of limits on the extremes of the prices, is just sound business. What we'll see now is a lot of finger pointing saying you left those prices too high. I saw that article this morning. For too long and we will see a lot of people trying to get out of these agreements. As a former lawyer and judge, and I'm sure you appreciate the lawyers are going to have a field day with this for a long time. This will be in the courts, the insurers, those who drafted the contracts. Lawyers will have a lot to work with. So why not design a system that can deal with these extremes and put those aside, versus leaving ourselves so vulnerable and then spending a lot on the cleanup. Since you are a lawyer and a former judge, what are your intuitions. I'm not asking you to decide on the legal issues, which obviously will be very complexibill depend on the individual contracts. But do you have a view about the question of what we should do here. I mean, I'm very sympathetic to your view that we should have regulation that doesn't allow contracts that have the effect of bankrupting people for events that they should have rationally as a pure economic rational actors calculated, but in fact being mere humans that they didn't. I'm a little less sympathetic. When it's a sophisticated economic actor like a power company on its own, then I'm a little more were inclined to say that they should be they should have to say that they should have a chance to sign a contract like this, dumb as it may be, and be that they should be held to account when they did sign such a contract. But do you have a view, broadly speaking about whether either individuals or businesses that are getting these enormous bills should actually now have to pay them. Quite apart from the question of whether we should allow people to enter contracts like this in the first place, I would need to think deeply about how much we can let people get out of their contractual commitments. You know, they'll be that this is an act of God forcemdu. I think going forward, we need to say we don't want this to happen again, and so what are the parameters we're going to put on a system through regulation that keep this from happening? And the thing that most people don't realize is that this is the tip of an iceberg. It's going to be repeated, not necessarily the deregulation of Texas, but the failure of electric grids are going to be repeated across the nation. And we need to talk now about what we are going to require of the providers of critical infrastructure and critical services to do to understand their future risk from climate change and what they're going to do about it. And I do believe that that will require a major overhaul of how we do business. You're seeing this emerge very starkly in the financial markets. You've seen the Bank of Villian England impose a stress testing. New Zealand has said it's going to require financial disclosure of climate risk across its market. Switzerland has also indicated it's looking at the same Canada tide. It's stimulus to disclosure for large corporations, and France has already been doing this since twenty sixteen for its thanks. We need to be thinking about a similar system to require our executives to begin to think about these risks that tend to be viewed as black swans or things that won't happen, but now, particularly with climate change, these are high consequence risks and they're no longer low probability, they're now high probability. But we have not changed our thinking to reflect that yet. And I'll just leave you this just a stunning study to me. MU Business School Stern Business School did a study in twenty nineteen of the directors for the Fortune one hundred companies looking at there did a survey of their biographical information. It looked at it for ESG, environmental, sustainability, and governance. When it got to the environment category, they were out of eleven eighty eight directors and these are running our top corporations, only five people, not five percent, five people cited any climate change background. Meanwhile, we have these huge events just coming along quickly and growing in intensity, but we are ill prepared. So you've seen the financial markets already saying we get it, we're probably going to get regulated, so we're going to try to get ahead of this. And in the utilities we're going to need to do the same so that they're prepared. But it's not just utilities. It's your wastewater treatment plants, it's your dams, it's your bridges, every piece of infrastructure communications is vulnerable to climate change impacts going forward. Alice, you have something like a patent on the term resilience. In the Obama White House, you were senior director for resilience. You've written a book about how he can be resilient. Tell me what resilience means to you, not only in the infrastructure context, but more broadly. I mean it. It's one of those sort of master terms of our era. Say say more about it for me, Sure you know resilience. For me, it means essentially the ability to prepare, for, withstand, and respond to extreme events, and so that means that it would include future extremes. But it's useful, and it's particularly useful with a politically charged topic like climate change. Some politicians want to talk about resilience when they don't want to talk about adaptation because adaptation reads climate change, resilience reads I don't have to have an opinion on climate change. Alice, you lay out seven principles of resilience in your book. Would you give us some highlights from the Big seven? Well, there are seven key principles that we're developed through a group co chaired focusing on what do we do to have better outcomes for infrastructure in the phase of extreme weather from climate change. A few of those are particularly apt for the situation we're facing now in Texas. The first thing is we need to no longer think of infrastructure is separate components, that if we just protect one component, we will be protecting everything else. The world is so interconnected now. These systems are so interconnected and all of them are connected to the grid that if we have one system go down, it's a bit like dominoes, just everything else collapses along the way. We also need to think in terms of multi hazards, so we tend to think just a flood problem, for example. But we have had one of the most painful examples of what we can and should plan for with the pandemic. So in the midst of this pandemic, we've had thirty named storms in the Atlantic, so many named storms that we had to use the Greek alphabet. We've seen the hottest temperatures that we've seen, we believe, ever recorded on the earth in the aptly named Death Valley in California. We've seen unprecedented cyclones and wildfires that have driven people out of their home seeking shelter and putting them at higher risk for infection from COVID nineteen. Our firefighters, our emergency managers have all been put at greater risk during these events. So we need to plan and think through that. We are in a world now where we are going to have compounding events, close in time events, simultaneous consecutive events. We're just going to get hit a lot, and that requires us to rethink instead of just preparing for one particular hazard. And then I think the last end for Texans right now, as they plan going forward, we should always be anticipating that. Of course we are going to suffer bad events, but how can we plan now to build back better in the future. Where can we identify to make improvements if something gets destroyed or something is damaged. How can we come back bigger, stronger, better in the face of disaster, And that usually requires planning and thinking through where we can spend our precious dollars most effectively. Lots we can do here. There is reason for optimism, and there's hope for all of us to be engaged in ensuring that we have a bright future ahead. As I wonder if I could close on a personal note, I'm amazed by your career path You ran the white collar crime unit in the US Attorney's Office in Los Angeles, which is a very high powered job to have had in criminal law. You were a judge on the Superior Court in Los Angeles, and then you ended up as the true maven of preparing for responding to extreme climate events within this resilience framework, what was the pathway that shifted you from the very distinguished career in criminal justice to the very distinguished career that you've had in the totally unrelated I would think area of preparing our country for climate change. Well, here's the essential piece of career advice I can share. Be nice to those who sit next to In law school, I sat next to Janet Napolitano, and in two thousand and nine, she knew that I was getting a little tired of being a judge being dispute resolution. I deeply admire our judges. They shoulder a great deal of responsibility and it can often be heartbreaking the choices that they have to make. After over a dozen years as a judge, I knew that I didn't want to spend the rest of my career in dispute resolution. I'm in a different form of dispute resolution when you're in policymaking, but not head on, where there's a winner and a loser every day with every case in courtrooms across the country. So she knew that I was interested in a career change, and she asked me. She called me up and said, hey, what do you think about coming to Washington? And after thinking about it for a little while, I'm figuring out how to make that be a success for my family, I chose to go. And one of the very first assignments I got was this issue of climate change. And the reason I got it is because I was sitting around a large conference room with a bunch of senior leaders from the Department the Homeland Security, which, as you know, is the third largest agency in the federal government, over two hundred thousand employees, responsible for immigration, emergency management, our coastal waterways. And President Obama just signed an executive order requiring agencies to engage in adaptation planning in two thousand and nine, and to some extent still now, climate change was not mute as a career enhancer. It as a something that would probably hurt you in your career. In fact, I was advised that when I started working on the issue. But sitting around this conference table, everyone's got their arms crossed against their chests, They're leaning back in their chairs, and as I remember it, somebody said, Oh, give it to her. She's new, she'll do it. And I was handed this assignment which gave me an extraordinary opportunity to learn from some of the very best scientists across the federal government, experts who had been thinking deeply about this, and it's me on this journey and made me appreciate this is one of the biggest threats and one of the most unfamiliar threats humanity has ever faced in its long history. Alice, thank you for just extremely clear analysis and thinking, and for a very sobering message about what we can do better, and for your ongoing terrific work on this subject. Thank you so much. Thank you, what a pleasure to join you. I so appreciate the opportunity. In the course of this fascinating conversation with Alice, several key takeaways emerged in my mind. The first is that what happened in Texas was predictable, far from being a freak event. Texas had experienced. Alice points out cold temperatures comparable to these as recently as forty years ago, so it should have been possible for Texas to realize that it did need to harden its infrastructure against potential low temperatures. Second, and to my mind, the most surprising of these takeaways, Alice points out that it was not in particular Texas's distinctive deregulatory political culture that led to the problems here, because New York and California, places with more progressive governments and more regulation of various kinds, made similar mistakes in failing to invest in infrastructure to overcome potential serious climate challenges in the past, with Hurricane Sandy as a prominent example. In other words, according to Alice, our failure to invest more in our infrastructure isn't really a product of any political commitment. It's rather the product of the human impulse to fail to make sufficient investments in events that seem low probability to us, but are in fact extremely high cost. Yet another takeaway is that as a nation, we face a genuine moral hazard when it comes to how we ensure ourselves against extreme climate events. Individual states spend the money on preparation, but the whole federal government, which means all of us is taxpayers put up the money to bail out those areas where things go awry. Whenever the people who pay for the accident are not the same people who are buying the insurance in the first place. You have a moral hazard problem and you get under investment in prevention, and that seems to be the case with respect to climate right now. Last, but not least, I walked away from my conversation with Alice more convinced than ever of the need for us to improve the regulatory schemes that enable states to get away with not investing what they should. The federal government isn't a solution to every problem that we have in the world, but climate is as borders. Infrastructure is acrossed borders, electric power grids are across borders, and for that matter, health, as we've learned in the context of a pandemic, is very much also across borders. In all of these contexts, we need more, not less, centralized, rationalized planning regulation in order to avoid extreme events actually having the impact that the Texas cold snap did have on so many human beings. Until the next time I speak to you, be careful, be safe, and be well. Deep Background is brought to you by Pushkin Industries. Our producer is Mo laboord our engineer is Martin Gonzales, and our shorerunner is Sophie Crane mckibbon. Editorial support from noahm Osband. Theme music by Luis Guerra at Pushkin. Thanks to Mia Lobell, Julia Barton, Lydia Jean Cott, Heather Fain, Carli Bigliori, Maggie Tay, Eric Sandler, and Jacob Weisberg. You can find me on Twitter at Noah R. Feldman. I also write a column for Bloomberg Opinion, which you can find at Bloomberg dot com slash Feldman. To discover Bloomberg's original slate of podcasts, go to Bloomberg dot com slash Podcasts and if you liked what you heard today, please write a review or tell a friend. This is Deep Background.

Pushkin from Pushkin Industries. This is deep background. I'm Noah Feldman. Last month, we all saw the devastating images from Texas. Plunging temperatures and two severe winter storms in quick succession led to a breakdown of the state's energy grid. More than four and a half million homes and businesses were left without power. Not only that, water service was disrupted for more than twelve million people because of pipes freezing and bursting. It was an unprecedented failure of the state's infrastructure. This disaster in Texas was a wake up call for places all across the country. Our infrastructure is consistently and concerningly outdated. It often was not built to withstand extreme climate conditions of the kind we're seeing more of era of climate change. We don't seem to be prepared for more frequent and severe storms. Without a serious overhaul in the coming years, our electric grid, our water, and our sewage systems have the capacity to fail again, and to fail massively. Here to help us get behind the story of what really happened in Texas and what we can do about it going forward is Alice Hill. Alice is one of the country's leading experts on climate resilient infrastructure. She's now a Senior Fellow for Energy in the Environment at the Council on Foreign Relations, but before that, she was Special Assistant to President Obama and Senior Director for Resilience in the White House. She led the national policy regarding preparing for the impact of climate change. In that role, Alice, I'm very grateful to you for joining us. Welcome to deep background, Alice. I wonder if we could start with you walking us through what you see as the true root causes of the disaster that we saw in Texas, because there, you know, there are many opinions out there about quote unquote what really went wrong, So maybe just start with the temperature anomaly and what its immediate consequences were. Well, I'll have to start with the statement of temperature anomaly. I guess it depends on how far back you want to go, but certainly these temperatures were not an unprecedented event for Texas. Forty years ago, they had a similar event of at least as long duration and as least as cold temperatures. So if you want to drill down on what's an issue here, it's a choice not to invest in preparedness. You choose not to prepare your grid or extreme events, You're going to line that those extreme events can do heavy damage, and once your electric grid fails, it just cascades through all the other infrastructure sectors, causing widespread damage. And with climate change, we have an added twist the extremes that we will experience in the future that are fueled by warmer temperatures global average warmer temperatures will exceed the extremes in the past. So if Texas had done its job, it would have been if the utilities had done their job, they would have been prepared for a cold snap like what they just saw. But going forward, they also need to prepare for what will be unfamiliar events, events that have never occurred in recorded human history, and that will take perseverance and additionally money. We'll dive into that, but I think what you said is already really fascinating. If something was just a one in forty year probability, would you already have thought that If something is a one in forty year probability, let's say that an expenditure should be made to prevent that from having disastrous side consequences. What metric would you have used of costs and benefits. If someone had said, yeah, well it gets this cold in Texas every forty years, Well you need to do a cost benefit analysis of what are the costs of reinforcing your grid, and then what are the potential costs that you will suffer when that grid fails. We're hearing that it could be upwards of ninety billion dollars worth of damage, thirty lives lost, and there may be other consequences that are never included in that tallly. So, in terms of looking ahead, if you just take the basic cost benefit analysis that the federal government has provided across the board, if we spend one dollar now in for example, hardening our grid to extreme weather, we save six dollars in recovery costs. Now, there's a reason why electric grids don't want to invest in that, because it costs more money and that will increase rates and then you might have your rate payers upset. However, who ultimately bears the cost when the whole system collapses, And in this case, there'll be many people bearing the cost, but ultimately it could also be the federal taxpayers who have had nothing to do with the calamity that befell Texas. I do want to talk about bearing the costs, because I think it's vastly important. Is the one dollar spent save six dollars later a national statistic or is it one that could have been applied concretely in Texas? I mean, I guess what I'm wondering is how much would it have cost Texas to harden its infrastructure grid against cold Whether they're by saving the ninety billion dollars, Is it one sixth of that or is it a larger percentage. I think it's a lower percentage. The figure that I read is sixteen billion. We will get a lot greater granularity going forward on this. The vulnerabilities the electric grid in the face of climate change are huge. The costs are significant to harden the grid against those costs. But because our electric grid is central to human existence at this point in a developed nation like the United States, if we lose our grid in an extreme event, we will have enormous costs. It's not as if this hasn't happened before. It happened with Hurricane Sandy, and in that instance it was a very strong storm, but it was the fact that New York had neglected to include in its planning that lower Manhattan had suffered about a foot of sea level rise, and because they failed to include that in their planning, when the storm search came in the water, the storm surge at wall of water that comes in front of a storm quickly overcame the flood berriers that Manhattan had built. Those were built to assuming a maximum of twelve feet, came in close to fourteen feet. The water immediately poured in, a substation exploded, and the city that Never sleeps plunged into darkness. Eight million people along the Northeast corrid or lost power, and huge downstream failures of transportation, healthcare, communications, And that was a sixty billion dollar event as well. Now, in response, con Edison, after some pressure, has really emerged as a leader in hardening its grid to future events. Also, I'm really fascinated by the Sandy comparison for the following reason. Part of the narrative about what went wrong in Texas is about out a deregulatory environment in a state that believes in deregulation, right, a state that like Texas, self consciously separated its grid from the grids of other states in part, at least, as I've read, to avoid being subject to certain kinds of federal regulation, and so we sort of think to ourselves, Oh, Texans don't want to be regulated. But you're describing that events of comparable consequence and of comparable error were made in New York, which is not characterized by that kind of deregulatory impulse. So I'm wondering were the motives in the Sandy case for the failure to harden the grid similar to identical to the motives in Texas, namely that, as you said, nobody wants to spend money right now to save money sometime in the future unless they're obligated to do so. I think that's the largest challenge, is that everyone's trying to run a lean machine at low costs. But I would just point out it's not just Texas or New York. Look at California. We have utilities that have underinvested in preparation for the wildfires. The wildfires have been worsened by climate change. Going forward, you have to ask how does the world's strongest economy function when it's grid is not up to even historical risks, much less the future risks that climate change will bring or is already bringing these new extremes that have never been experienced. There was just a study issued today by one of the major consultancies, ICF estimating that there's at least five hundred billion dollars worth of work that needs to be done on the electric grid to harden it to the kinds of extremes that we will be experiencing to get ourselves prepared for climate change. I'm genuinely fascinated by this, by what you're saying, and I'm also really surprised by it. So right away, there's a takeaway here that I didn't anticipate. And if I can say it and tell me if I'm getting it right. You know, the social psychologists and the behavioral economists have taught us that we as humans are really bad at calculating improbable but very bad future events. Also in probably very good future events, we hyperbolically discount, and we do it very badly. And if I'm hearing you right, the failure to invest sufficiently in hardening infrastructure against climate extremes seems to be more caused by that human tendency that's universal. Doesn't matter what your politics are, doesn't matter where you stand on regulation, because as you say it, exists in New York. It existed in New York, although it's better now. It exists in California still, and it exists in Texas. And so from that perspective of the version of the story that's been circulating in I guess it would be fair to say liberal elite circles that tends to blame Texas distinctively is kind of misplaced. You know, I mean, Texas got it wrong, and that's not good. But California also got it wrong, and in the past, New York got it wrong. And that's because we're all humans, not because some of us have one view of regulation and some of us have a different view of regulation. Well, I would say that what's difficult with climate change is that because we are risk is humans, based on our own experience, the availability bias, we tend to think that the last extreme is the very worst thing that could happen. When someone says, you know, I've lived here for fifty years and this has never happened before, it's just unprecedented. That's understandable, but it's not really particularly newsworthy because with climate change, we are going to be seeing successively worse events, and so the challenge is what level of preparation do you need. In Texas' case, they didn't invest in preparing for past extremes. In California's and in New York's it was future extremes that had then materialized, so it was planning from based on historical path. In Texas' case, they actually had had this experience. In California case, they've had a lot more development in these areas wildland urban interface that put more people in places where fire occurs, and then there's more ignitions and can be more flammable materials accumulating, and a lot of other complex factors. But in Texas, there was a choice not to prepare for an event that had occurred forty years ago and an event they had a cold snap in twenty eleven that they didn't choose to change how they did business after that. With regulation, you might see improvement on that, and that's what we've seen with con Edison. Regulation or agreement by the company in the course of being regulated has led to improvement. Am I right in interpreting what I've read to suggest that Texas wasn't subject to federal regulation here by virtue of the way that it chose to keep its grid separate from adjoining grids. Yes, it consciously said we don't want to have to deal with the fits, so we're going to keep all our generation within our state, essentially, and had increased its vulnerability because when you're having trouble in one area, of classic solution is to ask somebody else nearby to lend a helping hand, and that could be in the utility in another state that could send transmit some power to you. But Texas had basically made a decision that it wanted to be an island and to itself, which increased its vulnerability. Would you think that a good solution for this is that federal law should be changed so that states can, assuming it's possible, which maybe it isn't, so that states can't really opt out. I mean, under the constitution, Congress would certainly have the power to regulate state power grids even if they were separate from other states, because the power grade in a state like Texas affects the interstate economy, even if they're not literally physically connected to the grids from other states. So that's just a policy choice by Congress to run the regulatory system this way. I mean ought that to be different, so that all states, no matter where they are, no matter what choices they make, are subject to federal regulation. Well, you've raised essential point when it comes to climate change, because under our current system, the federal government largely differs on these decisions to state and local authorities, and that includes regulation of land use, regulation of building codes. And what we get is a patchwork across the United States, and in the area of building codes, all of our building codes at this point only look to historic past. We don't yet even have model that really look to the future. But even with our history model codes that look to protect us from extremes of the past, more than fifty percent of the states don't even bother to adopt those codes, including states that are in the path of frequent extreme events. So that is just a decision that we've said constitutionally, we're going to let the state and locals make this decision. But this collides with the expectation that has now grown among Americans that when things go wrong, the federal government's going to bail us out. So you saw Texas said, oh, look this is terrible, we need help federal government, And we see that all the time. And we've also seen a paradigm that shifted from Eisenhower's time, when basically before Eisenhower, local communities were told, yeah, you get to make your choices locally about what you do, but you also are going to take care of the disaster. We're just we'll send you help with the Red Cross. At the federal government, we're not in the disaster recovering business. But that changed with Dwight Eisenhower. And from a very modest like I think it was about five hundred thousand dollars or something under Dwight Eisenhower, it's now the federal government typically pays seventy percent, sometimes ninety percent, and often one hundred percent of disaster recovery in these big events. So you've got state and locals making choices about how they want to live, and those choices often involve significant risk. Living in floodplains, living in areas prone to fire, and building codes that are not floodproof or fireproof. Bad things happen, huge losses, and then Congress says, oh, yes, we need a bailout. Saint Paulson who called these climate bailouts, and he astutely observed that it will be very hard to turn off the spick it on climate bailouts. And that's why it's so important to encourage local communities and states to invest in risk production so we get take advantage of this one to six ratio. You're really describing a tremendous moral hazard problem. I mean, it's polite of you to say that we should encourage the states, but the truth is, if the states can spend less and then be bailed out by the whole country, by the taxpayers of the whole country, their incentive is precisely to underinvest. I mean, that's you know, it sounds like you're making a case for requiring the states to invest in hardening infrastructure, not a case for encouraging it. I mean, you're being polite, but it sounds like, given the incentives you're describing, if you and I and the tax payers everywhere else in the country are going to be paying for it, we should be upfront demanding that and requiring as a matter of law that individual states invest enough that they don't have to be bailed out. Well, I agree with that policy, but it turns out it's very difficult to gain the political will to implement such policy. In the Obama administration, there was an idea of a disaster deductible. So essentially, if states would invest more in pre disaster reduction of risk, better building codes, better land use practices, better investments in their electric grid, when the disaster hit, the federal government would pay more a higher percentage to that state of their losses in recognition that they'd already spent money in risk production. And those who chose like Texas, which has not historically had strong building codes or land use practices or electric grid requirements, you would say under that scenario, well, you chose not to because you wanted to keep your tax base a high and you wanted to attract all this investment, but you didn't want to have the higher prices of the homes in the land develop use issues. So you will pay more in post disaster. You're going to pick up more of the tab that it got all the way to comment under Obama in the rags, it was very quiet. Under Trump, I think it will be difficult. The politics of it are so difficult. We do have one example where we have successfully done this as a nation, at least one and that is on our barrier islands. We have passed the Coastal Barrier Act in the sixties that essentially said, in those areas, we're not going to give any more federal money to development in those areas, and if a disaster occurs, you're on your own. So we essentially said the federal government's interest, it's just those areas are too vulnerable. The local communities can go ahead and do it, but we're not going to be supporting it, and that has held. We'll be right back. Let's talk a little more about where the costs of this disaster have already fallen. One of the issues that's gotten the most attention is that some individuals and also some energy businesses basically had versions of contracts where they would get a lower price of service for the ordinary days in exchange for the idea that when costs went up, they would pay some proportion of the wholesale costs of energy, which is, in principle, was supposed to be a fair contract. Right, I get a lower price when the price is low, and then I pay a higher price when the price is high. Then, for a brief time, some number of days during the disaster, when electricity went offline, the price of power skyrocket to an enormous set of prices enough that it could bankrupt ordinary people with some enormous power bills. Are contracts like that just flat out irrational? Should we not be allowing those kind of contracts at all because of the fact that at the extreme they have these effects, or are those contracts that actually would be morally justifiable provided that they're actually carried through, you know, provided that you save money when you save it, and then when you when it costs a lot of money, you have to pay the money. Well, I think this is a point where the market collides with people's expectations. And yes, the Harvard professor who helped construct the Texas system said the system was working as it was supposed to when when their resources scarce, the price is supposed to go go up. But we're talking about ordinary humans at the other end of this, and sometimes it's the utilities, but sometimes it's going to be the individuals who were just shopping around for a cheap break. And we're not investigating what would happen if there's a forty year event that shuts down the entire group in Texas and they have trouble generating power that's just beyond the average consumer. And I think it's naive for us to expect the average consumer would in fact investigate that. So that's why it's shocking when we hear these numbers. No one contemplated it when they were entering it, certainly as an ordinary investor and probably even sophisticated investors. Because of the availability bias and our optimism bias, we think these bad things won't happen. We never really pencil it out how bad it could be and that it could drive us into bankruptcy. But when we're dealing with extreme events, I think regulation is appropriate because they're not ordinary events. There are events that are not in the ordinary course of business. So just as we need insurance for in case we have a terrible car accident, we want insurance on our best and most important assets, our home. We need to find ways to provide insurance but also regulate this market. For me, it's a bit of an analogy of these building codes. Building codes have been around for thousands of years. People have recognized for a long time that it's too hard for the purchaser to figure out whether their house is sound or not. We need building codes to help us make those judgments, and that's where regulation can help drive better outcomes. I think regulation of the electricity grid, for in terms of hardening and in terms of limits on the extremes of the prices, is just sound business. What we'll see now is a lot of finger pointing saying you left those prices too high. I saw that article this morning. For too long and we will see a lot of people trying to get out of these agreements. As a former lawyer and judge, and I'm sure you appreciate the lawyers are going to have a field day with this for a long time. This will be in the courts, the insurers, those who drafted the contracts. Lawyers will have a lot to work with. So why not design a system that can deal with these extremes and put those aside, versus leaving ourselves so vulnerable and then spending a lot on the cleanup. Since you are a lawyer and a former judge, what are your intuitions. I'm not asking you to decide on the legal issues, which obviously will be very complexibill depend on the individual contracts. But do you have a view about the question of what we should do here. I mean, I'm very sympathetic to your view that we should have regulation that doesn't allow contracts that have the effect of bankrupting people for events that they should have rationally as a pure economic rational actors calculated, but in fact being mere humans that they didn't. I'm a little less sympathetic. When it's a sophisticated economic actor like a power company on its own, then I'm a little more were inclined to say that they should be they should have to say that they should have a chance to sign a contract like this, dumb as it may be, and be that they should be held to account when they did sign such a contract. But do you have a view, broadly speaking about whether either individuals or businesses that are getting these enormous bills should actually now have to pay them. Quite apart from the question of whether we should allow people to enter contracts like this in the first place, I would need to think deeply about how much we can let people get out of their contractual commitments. You know, they'll be that this is an act of God forcemdu. I think going forward, we need to say we don't want this to happen again, and so what are the parameters we're going to put on a system through regulation that keep this from happening? And the thing that most people don't realize is that this is the tip of an iceberg. It's going to be repeated, not necessarily the deregulation of Texas, but the failure of electric grids are going to be repeated across the nation. And we need to talk now about what we are going to require of the providers of critical infrastructure and critical services to do to understand their future risk from climate change and what they're going to do about it. And I do believe that that will require a major overhaul of how we do business. You're seeing this emerge very starkly in the financial markets. You've seen the Bank of Villian England impose a stress testing. New Zealand has said it's going to require financial disclosure of climate risk across its market. Switzerland has also indicated it's looking at the same Canada tide. It's stimulus to disclosure for large corporations, and France has already been doing this since twenty sixteen for its thanks. We need to be thinking about a similar system to require our executives to begin to think about these risks that tend to be viewed as black swans or things that won't happen, but now, particularly with climate change, these are high consequence risks and they're no longer low probability, they're now high probability. But we have not changed our thinking to reflect that yet. And I'll just leave you this just a stunning study to me. MU Business School Stern Business School did a study in twenty nineteen of the directors for the Fortune one hundred companies looking at there did a survey of their biographical information. It looked at it for ESG, environmental, sustainability, and governance. When it got to the environment category, they were out of eleven eighty eight directors and these are running our top corporations, only five people, not five percent, five people cited any climate change background. Meanwhile, we have these huge events just coming along quickly and growing in intensity, but we are ill prepared. So you've seen the financial markets already saying we get it, we're probably going to get regulated, so we're going to try to get ahead of this. And in the utilities we're going to need to do the same so that they're prepared. But it's not just utilities. It's your wastewater treatment plants, it's your dams, it's your bridges, every piece of infrastructure communications is vulnerable to climate change impacts going forward. Alice, you have something like a patent on the term resilience. In the Obama White House, you were senior director for resilience. You've written a book about how he can be resilient. Tell me what resilience means to you, not only in the infrastructure context, but more broadly. I mean it. It's one of those sort of master terms of our era. Say say more about it for me, Sure you know resilience. For me, it means essentially the ability to prepare, for, withstand, and respond to extreme events, and so that means that it would include future extremes. But it's useful, and it's particularly useful with a politically charged topic like climate change. Some politicians want to talk about resilience when they don't want to talk about adaptation because adaptation reads climate change, resilience reads I don't have to have an opinion on climate change. Alice, you lay out seven principles of resilience in your book. Would you give us some highlights from the Big seven? Well, there are seven key principles that we're developed through a group co chaired focusing on what do we do to have better outcomes for infrastructure in the phase of extreme weather from climate change. A few of those are particularly apt for the situation we're facing now in Texas. The first thing is we need to no longer think of infrastructure is separate components, that if we just protect one component, we will be protecting everything else. The world is so interconnected now. These systems are so interconnected and all of them are connected to the grid that if we have one system go down, it's a bit like dominoes, just everything else collapses along the way. We also need to think in terms of multi hazards, so we tend to think just a flood problem, for example. But we have had one of the most painful examples of what we can and should plan for with the pandemic. So in the midst of this pandemic, we've had thirty named storms in the Atlantic, so many named storms that we had to use the Greek alphabet. We've seen the hottest temperatures that we've seen, we believe, ever recorded on the earth in the aptly named Death Valley in California. We've seen unprecedented cyclones and wildfires that have driven people out of their home seeking shelter and putting them at higher risk for infection from COVID nineteen. Our firefighters, our emergency managers have all been put at greater risk during these events. So we need to plan and think through that. We are in a world now where we are going to have compounding events, close in time events, simultaneous consecutive events. We're just going to get hit a lot, and that requires us to rethink instead of just preparing for one particular hazard. And then I think the last end for Texans right now, as they plan going forward, we should always be anticipating that. Of course we are going to suffer bad events, but how can we plan now to build back better in the future. Where can we identify to make improvements if something gets destroyed or something is damaged. How can we come back bigger, stronger, better in the face of disaster, And that usually requires planning and thinking through where we can spend our precious dollars most effectively. Lots we can do here. There is reason for optimism, and there's hope for all of us to be engaged in ensuring that we have a bright future ahead. As I wonder if I could close on a personal note, I'm amazed by your career path You ran the white collar crime unit in the US Attorney's Office in Los Angeles, which is a very high powered job to have had in criminal law. You were a judge on the Superior Court in Los Angeles, and then you ended up as the true maven of preparing for responding to extreme climate events within this resilience framework, what was the pathway that shifted you from the very distinguished career in criminal justice to the very distinguished career that you've had in the totally unrelated I would think area of preparing our country for climate change. Well, here's the essential piece of career advice I can share. Be nice to those who sit next to In law school, I sat next to Janet Napolitano, and in two thousand and nine, she knew that I was getting a little tired of being a judge being dispute resolution. I deeply admire our judges. They shoulder a great deal of responsibility and it can often be heartbreaking the choices that they have to make. After over a dozen years as a judge, I knew that I didn't want to spend the rest of my career in dispute resolution. I'm in a different form of dispute resolution when you're in policymaking, but not head on, where there's a winner and a loser every day with every case in courtrooms across the country. So she knew that I was interested in a career change, and she asked me. She called me up and said, hey, what do you think about coming to Washington? And after thinking about it for a little while, I'm figuring out how to make that be a success for my family, I chose to go. And one of the very first assignments I got was this issue of climate change. And the reason I got it is because I was sitting around a large conference room with a bunch of senior leaders from the Department the Homeland Security, which, as you know, is the third largest agency in the federal government, over two hundred thousand employees, responsible for immigration, emergency management, our coastal waterways. And President Obama just signed an executive order requiring agencies to engage in adaptation planning in two thousand and nine, and to some extent still now, climate change was not mute as a career enhancer. It as a something that would probably hurt you in your career. In fact, I was advised that when I started working on the issue. But sitting around this conference table, everyone's got their arms crossed against their chests, They're leaning back in their chairs, and as I remember it, somebody said, Oh, give it to her. She's new, she'll do it. And I was handed this assignment which gave me an extraordinary opportunity to learn from some of the very best scientists across the federal government, experts who had been thinking deeply about this, and it's me on this journey and made me appreciate this is one of the biggest threats and one of the most unfamiliar threats humanity has ever faced in its long history. Alice, thank you for just extremely clear analysis and thinking, and for a very sobering message about what we can do better, and for your ongoing terrific work on this subject. Thank you so much. Thank you, what a pleasure to join you. I so appreciate the opportunity. In the course of this fascinating conversation with Alice, several key takeaways emerged in my mind. The first is that what happened in Texas was predictable, far from being a freak event. Texas had experienced. Alice points out cold temperatures comparable to these as recently as forty years ago, so it should have been possible for Texas to realize that it did need to harden its infrastructure against potential low temperatures. Second, and to my mind, the most surprising of these takeaways, Alice points out that it was not in particular Texas's distinctive deregulatory political culture that led to the problems here, because New York and California, places with more progressive governments and more regulation of various kinds, made similar mistakes in failing to invest in infrastructure to overcome potential serious climate challenges in the past, with Hurricane Sandy as a prominent example. In other words, according to Alice, our failure to invest more in our infrastructure isn't really a product of any political commitment. It's rather the product of the human impulse to fail to make sufficient investments in events that seem low probability to us, but are in fact extremely high cost. Yet another takeaway is that as a nation, we face a genuine moral hazard when it comes to how we ensure ourselves against extreme climate events. Individual states spend the money on preparation, but the whole federal government, which means all of us is taxpayers put up the money to bail out those areas where things go awry. Whenever the people who pay for the accident are not the same people who are buying the insurance in the first place. You have a moral hazard problem and you get under investment in prevention, and that seems to be the case with respect to climate right now. Last, but not least, I walked away from my conversation with Alice more convinced than ever of the need for us to improve the regulatory schemes that enable states to get away with not investing what they should. The federal government isn't a solution to every problem that we have in the world, but climate is as borders. Infrastructure is acrossed borders, electric power grids are across borders, and for that matter, health, as we've learned in the context of a pandemic, is very much also across borders. In all of these contexts, we need more, not less, centralized, rationalized planning regulation in order to avoid extreme events actually having the impact that the Texas cold snap did have on so many human beings. Until the next time I speak to you, be careful, be safe, and be well. Deep Background is brought to you by Pushkin Industries. Our producer is Mo laboord our engineer is Martin Gonzales, and our shorerunner is Sophie Crane mckibbon. Editorial support from noahm Osband. Theme music by Luis Guerra at Pushkin. Thanks to Mia Lobell, Julia Barton, Lydia Jean Cott, Heather Fain, Carli Bigliori, Maggie Tay, Eric Sandler, and Jacob Weisberg. You can find me on Twitter at Noah R. Feldman. I also write a column for Bloomberg Opinion, which you can find at Bloomberg dot com slash Feldman. To discover Bloomberg's original slate of podcasts, go to Bloomberg dot com slash Podcasts and if you liked what you heard today, please write a review or tell a friend. This is Deep Background.