Floods, flood policies and changes in welfare and inequality: Evidence from Germany

Floods in Germany have caused significant economic damage and are expected to become more frequent. The economic damage expected as a result of floods will affect households differently across income levels. A method, rooted in economic theory, is proposed to estimate changes in household welfare and income inequality resulting from expected flood damage. It is found that welfare losses after floods disproportionately harm low income households and increase inequality by 0.14%. Families with dependent children and householders of retirement age in the lowest income quartile are the most affected. In order to collect additional resources to cover the cost of the financial relief, the of additional income, real estate and energy taxes are investigated. These instruments yield a reduction in income inequality. It is also shown that rewarding investment in mitigation and insurance, and supporting low income households can be jointly achieved when re-allocating additional energy-tax revenues.