Gilles Thirion
OECD Economic Surveys: Canada 2025
Abstract
Canada faces mounting adaptation challenges as climate risks, particularly floods and wildfires, increasingly impact people, homes, and infrastructures. Many Canadians lack awareness of the climate-related risks they are exposed to. Meanwhile, development continues in hazard-prone areas. Climate risks pose key challenges to critical infrastructures, whose failure can generate cascading service disruptions with broad-based implications. Although Canada launched its first National Adaptation Strategy in 2023, achieving its targets will require substantial acceleration of adaptation efforts, starting with raising awareness through better mapping of hazard risk and improved risk disclosure. Strong collaboration across government levels is necessary. Faster progress in integrating climate risks into land-use planning is needed to restrict development in hazard-prone areas. Access to affordable flood insurance should be expanded in combination with strong incentives for risk reduction. In high-risk areas, relocation should be considered. Stepping up existing programmes and ensuring sufficient funding availability is critical to support investment in resilient infrastructure.
3.1.1. Transitioning to net zero requires sustained policy commitments
As a major producer of heavy crude oil and natural gas, Canada’s per capita greenhouse gas (GHG) emissions rank among the highest in the OECD. Geographic and climatic factors further contribute to high energy intensity, particularly for heating and transportation. Therefore, major efforts to mitigate climate change are needed, as discussed in depth in the 2023 Economic Survey of Canada (OECD, 2023[1]). Over the past two decades Canada has already made progress on decoupling greenhouse gas emissions from economic growth. A shift from coal-fired power to natural gas and renewable energy helped reduce the emission-intensity of electricity production, which overall, is comparatively clean due to strong reliance on non-emitting sources (about 80%) such as hydroelectricity and nuclear energy. The energy-intensity of economic activity also declined, reflecting energy-efficiency improvements in homes and some heavy industries. However, these gains have been offset by increased emissions from growth in Canada’s resource and energy-intensive economy (OECD, 2023[1]).
Canada needs to achieve significant emissions reductions to meet its international climate commitments. A new climate plan with a revised 2030 target is in place to accelerate Canada’s transition to net zero by 2050, with a target of reducing emissions by 45-50% below 2005 levels by 2035, in line with the Paris Agreement. Achieving the targeted emission cuts will require major energy savings and a broader shift from fossil fuels to clean energy. Residual emissions will need to be captured, stored, or offset through sequestration. Alongside, policies should ensure these changes minimise negative impacts on economic activity and living standards.
Carbon pricing plays a central role in Canada’s emissions reduction strategy. However, the carbon pricing system was weakened in spring 2025, when the government passed regulations that ceased the application of the federal fuel charge, setting it to zero as of April 2025. This followed the implementation in 2023 of a temporary three-year suspension of the federal fuel charge on deliveries of heating oil. The other key component of the carbon pricing system, the Output-Based Pricing System (OBPS) remains in place (see also Chapter 1). The removal of the federal fuel charge reduces the direct price signal to consumers and weakens the system’s effectiveness in supporting Canada with its GHG emission reduction targets for 2030. Canada should reapply the fuel charge to safeguard its comprehensive carbon pricing system while maintaining efforts to address distributional concerns through the Canada Carbon Rebate.
Although hydropower, a low-carbon source of energy generation, makes up for much of Canada’s electricity generation, additional efforts are needed to decarbonise electricity production. Provinces still need to ramp green energy generation to replace carbon-intensive electricity sources while addressing new demands from the electrification of industry, transport and buildings. Reforms to pool power and transition to market-based pricing could lower the cost of the green energy transition. Additional investment is needed to upgrade and adapt grids to greater electricity demand and increasing reliance on intermittent energy sources.
Oil and gas extraction contributes about 26% of Canada’s greenhouse gas emissions. Oil sands extraction and processing alone accounts for 12% of total emissions, according to the National Inventory Report (2024[2]). To encourage the sector’s decarbonisation, efforts should accelerate to strengthen the price signals of oil and gas extraction. The recently proposed cap-and-trade system would be a step in that direction. By combining market-based incentives with regulations governments can provide strong incentives for investment in decarbonisation while avoiding relocation of oil and gas operations to jurisdictions with weaker climate policies.
Road transport remains a major source of emissions, with passenger vehicles being responsible for about 65% of road transport emissions, according to the National Inventory Report (2024[2]). This notably reflects high car ownership rates and generally less fuel-efficient vehicles than in other countries. Canada's Zero-Emission Vehicles (ZEV) Sales Mandate, adopted in December 2022, is a welcome effort that requires all sales of new passenger cars and light trucks be ZEVs by 2035, with interim targets of at least 20% by 2026, and at least 60% by 2030. Further incentives for zero-emission vehicles take-up must be combined with efforts to reduce emissions from conventional vehicles and a wider policy focus on reducing car dependency. There is scope to boost the appeal and accessibility of public transport through road user charging and fewer barriers to housing supply in cities. The proposed high-speed rail project between Quebec City and Toronto is a key initiative for decarbonizing transportation in Canada, as it could reduce emissions by shifting passenger traffic from cars and planes to cleaner rail travel.
Canada uses large amounts of energy to heat buildings, including from burning natural gas and oil. Total emissions from homes have been broadly stable since 1990, as the expansion in the housing stock has been offset by energy-efficiency improvements and declining use of fuel oils for heating (OECD, 2023[1]). However, emissions from commercial and public buildings have risen. Further market-based incentives, along with better public information on building energy performance, are needed to accelerate upgrades of energy-intensive homes and other buildings in view of attaining emission reduction targets.
3.1.2. Climate change has a significant but unequal impact across Canada's regions
The effects of widespread warming are already apparent in many parts of Canada and are projected to intensify in the future (Bush and Lemmen, 2019[3]). Average temperature in Canada has increased by 2.2 degrees Celsius (°C) in 2023 since 1981-2010 (Figure 3.1). This is significant when compared to other parts of the world. A warmer climate is projected to intensify extreme weather events. This poses substantial economic, social, and environmental challenges.
Canada, with its vast and diverse geography, faces a range of climate risks that vary significantly across regions and municipalities. The warming has been most pronounced in northern Canada (Bush and Lemmen, 2019[3]). This is causing thawing permafrost and ice melt in the Arctic. The costs of adapting are expected to fall heavily on provinces and territories most exposed to fires and floods, such as Alberta and British Columbia. This means that some provinces and municipalities, which are responsible for key infrastructures, will face higher potential costs associated with climate risks. More frequent and intense rainfall events increasingly threaten urban centres, where impacts are magnified by high human and infrastructure density. Canada’s coastal areas are experiencing sea-level rise and rising risk of storms (Canadian Climate Institute, 2022[4]).
Annual surface temperature change in 2023 compared to average 1981-2010
Note: Countries’ average temperature increases; different regions within countries might be affected differently. OECD and EU data are unweighted averages.
Source: Maes, M. J. A., et al. (2022), "Monitoring exposure to climate-related hazards: Indicator methodology and key results," OECD Environment Working Papers, No. 201, OECD Publishing, Paris.
Some socio-economic groups in Canada are more vulnerable to the physical impacts of climate change. Low-income communities are generally more exposed to climate hazards, for instance because they are more likely to live in flood plains or in urban areas where the “heat island effect” is most intense (Canadian Climate Institute, 2022[4]). Women are also more vulnerable to climate related risks due to lower income and gendered caregiving roles. For example, 2005 Hurricane Katrina in the United States resulted in a higher death toll among women than men (David and Enarson, 2012[5]). Indigenous communities, many of whom reside in remote or coastal areas, face increased threats from rising sea levels, extreme weather events, and ecosystem changes. Melting permafrost and shifts in wildlife patterns threaten food security, housing and transport infrastructure, and have cultural impacts in Northern Indigenous communities.
Climate change is directly impacting key sectors of Canada’s economy, especially mining and resource extraction and food production. In forestry, higher temperatures and drier conditions increase the frequency and severity of wildfires and droughts, threatening timber resources and ecosystem health (Bush and Lemmen, 2019[3]) which can take decades to regrow. Coastal industries, especially fisheries, are at risk from rising sea levels and ocean temperature changes. By affecting marine habitats, they change the distribution and abundance of various fish species, impacting local economies. Agriculture faces disruptions from changing weather patterns, which affect crop yields and food supply. Additionally, the insurance sector is seeing rising costs as claims related to climate impacts increase, pushing up premiums and straining financial resilience in high-risk areas. At the same time, sectors that are key to the green transition, such as clean technologies, stand to benefit. Some Canadian producers could benefit from changes in climate, notably through longer growing seasons.
3.1.3. The costs from climate-related events are increasing
The cost of damage to properties and infrastructure from climate change and extreme weather events is growing, and this trend is expected to accelerate. Absent more resilient infrastructure, repair costs are likely to soar. Spending from the Disaster Financial Assistance Arrangements (see Figure 3.4) and insurance costs from natural disasters (Figure 3.2) have increased considerably over the past decade, although higher insurance costs also reflect increasing coverage following the introduction of flood insurance in 2015. According to the Insurance Bureau of Canada, from 2011 to 2020, insured losses from climate-related events were CAD 2.3 billion (or about 0.08% of GDP in 2023) per year on average, more than five times the average annual losses of CAD 440 million between 1983 and 2000 (Insurance Bureau of Canada, 2023[6]). Damage to electrical transmission and distribution infrastructure could than double by mid-century and triple by end of century according to recent estimates (Canadian Climate Institute, 2021[7]), costing up to CAD 4.1 billion annually (or about 0.15% of GDP). It is estimated that CAD 5.3 billion investment (or about 0.2% of GDP) per year will be needed over the next 50 years to reduce climate risks to municipal infrastructure in Canada, including roads, facilities, sewer systems and buildings (Canada’s Task Force on Flood Insurance and Relocation, 2022[8]).
The impact of climate-related hazards extends well beyond the direct costs of suspending local economic activity and rebuilding and repair expenses. It often reaches macroeconomic significance due to the cascading effects of infrastructure failures and business disruptions. It can also have repercussions on the financial system and put public finances under pressure in case of large events. A recent projection (Canadian Climate Institute, 2022[4]) shows that temperature rise could cause a loss of 2% of GDP by 2050.
Annual amount of catastrophic losses in Canada
Note: The chart shows the economic losses insured based on the midpoint of two estimates: the total losses that were insured, and the average of the insured losses across each individual event. Presenting the midpoint of the two estimates mitigates bias in the data from events with large total losses and low reported insured losses.
Source: Insurance Bureau Canada calculations based on estimates from Catastrophe Indices and Quantification Inc. (CatIQ), as of August 2024.
3.1.4. Climate risks put Canada’s critical infrastructure under stress
Canada’s changing climate is affecting critical infrastructure in multiple and complex ways. Increasingly frequent and intense floods, hurricanes, wildfires, and storms are wearing down key physical infrastructure that had not been designed to withstand such conditions. This causes certain infrastructures to age prematurely and increases risk of catastrophic failure. Given the interdependence between different infrastructure systems, damage from climate change and extreme weather events can produce cascading impacts. For instance, flooding can cause more damage due to dry and unstable soil conditions from earlier wildfire events. Disruptions can also cause supply chain problems that extend well beyond the immediate disaster area. For instance, transportation disruptions can shut down trade routes, ports, and prevent people from getting to work or accessing healthcare. Damaged infrastructure also affects the delivery of critical services such as electricity or internet access, which can impact people and affect businesses in areas not directly impacted by the climate hazard.
The 2021 floods in British Columbia illustrated how climate hazards can trigger cascading failures across critical infrastructure systems and cause widespread disruption in economic activity. The floods ravaged farms, destroying equipment, infrastructure, and causing significant livestock losses. In the towns of Merritt and Princeton it nearly suspended all economic activity. Utility services were disrupted for weeks, and the City of Merritt’s wastewater treatment plant failed, forcing the evacuation of the entire population (Lee and Parfitt, 2022[9]). The floods caused severe transportation infrastructure damage, destroying several highway segments and rail lines connecting Vancouver and South Western British Columbia. This restricted access to the Port of Vancouver, affecting trade. Costs were exacerbated by failures of the dike system and due to previous wildfire events, that left the soil more unstable and vulnerable. Overall, the cumulative costs from the 2021 climate disasters in British Columbia are estimated between CAD 10.6 and CAD 17.1 billion (Lee and Parfitt, 2022[9]), equivalent to between 3% and 5 % of provincial GDP, most of which are uninsured damages falling on households and businesses.
3.1.5. Floods, coastal risks and wildland fires present the biggest natural disaster risks
Flooding is Canada’s most common and costly natural disaster on average. Canada’s exposure to river flooding in percentage of built-up area is above the OECD average (Figure 3.3, panel A). Costs associated with all types of flooding events are expected to keep rising due to higher frequency and severity of weather-related events, such as changing storm and precipitation patterns and rising sea levels (Public Safety Canada, 2023[10]). About 80% of Canadian cities are partly built on flood plains (Canada’s Task Force on Flood Insurance and Relocation, 2022[8]). The impacts can be particularly acute around large urban centres like Montreal, Toronto, and Vancouver, where the density of population, infrastructures, and businesses amplifies the risks. Beyond causing massive repair and recovery costs, economic consequences can be considerable due to impacts from business interruptions and damages to critical network infrastructures, including transport, telecommunications, electricity grids, and water management.
Source: OECD Environment Statistics (database).
The rise in severe weather events comes as some of Canada’s infrastructure is aging while others were not designed to cope with increasing population density and current climate risks. A Statistics Canada survey in 2022 suggests that over a tenth of Canada's water systems are in "poor" or "very poor" condition (Statistics Canada, 2024[11]). Water management infrastructure failures in Montreal during summer 2024 underscored overdue investment in upgrading ageing sewer infrastructure and stormwater management systems. Major storms that caused massive floods in the streets of Toronto during summer 2024 also point to infrastructure vulnerability in the wake of increasingly heavy rainfall events.
Coastal communities in Canada, where over 6.5 million people live, are increasingly vulnerable to sea-level rise and storm surges due to climate change. National projections estimate that regional sea levels could rise by up to 100 cm by 2100 (Bush and Lemmen, 2019[3]). Gradual sea-level rise heightens the risk of inundation in coastal areas. However, flooding triggered by storm surges, possibly in combination with a high tide, is likely to remain an immediate concern (The Council of Canadian Academies, 2019[12]). Risks are severe in urban centres and economically vital areas like British Columbia's Fraser River delta. Key trade hubs, such as the ports of Vancouver and Halifax, have critical infrastructure that are highly exposed. By mid-century, sea-level rise and storm surges are expected to impose over CAD 50 billion (or about 2% of GDP) in present-value costs (Withey, Lantz and Ochuodho, 2016[13]). Most of these projected costs would be incurred in British Columbia due to the higher concentration of population, infrastructure and housing assets along the coast. Additionally, coastal wetlands, which provide ecosystem properties such as carbon sequestration and flood protection, are at risk of being lost to sea-level rise.
Hotter and windier summers combined with more erratic rainfalls have contributed to longer wildfire seasons. Exposure to wildfire in terms of exposed surface is high in Canada (Figure 3.3, panel B). Since 1959, the annual average area burned by wildfires has tripled in Canada (Bowman et al., 2020). British Columbia, Alberta, and the Northwest Territories have experienced some of their most severe wildfire seasons in recent years. The frequency and intensity of wildfires are set to escalate as the climate warms, threatening habitat and biodiversity, along with ecosystem services such as carbon storage (Bush and Lemmen, 2019[3]). The 2016 Fort McMurray wildfire in Alberta, Canada’s costliest natural disaster, resulted in approximately CAD 10 billion in total losses (or about 0.4% of GDP), destroying more than 2 400 structures, displacing 85 000 people, and disrupting the production and export of oil (The Council of Canadian Academies, 2019[12]). In 2023 Canada experienced its most destructive wildfire season in terms of burnt area (Natural Resources Canada, 2024[14]).
Wildfires often impact forestry and the extraction industries. In 2023, in response to spreading wildfires several Canadian forestry, and oil and gas producers suspended operations, causing significant losses of output. Wildfires can compromise critical infrastructures which can disrupt trade, as seen in 2023 in British Columbia with the shutdown of rail transportation at Fraser Canyon blocking thousands of rail cars. Toxic smoke emanating from wildfires can propagate far away, impacting tourism and causing serious air pollution in nearby populations. A week of wildfire smoke in June 2023 was estimated to have cost Ontario over CAD 1.2 billion in health impacts (Sawyer, Stiebert and Welburn, 2023[15]).
3.2.1. Risk reduction and investment in resilient infrastructure are cost effective adaptation strategies
As in other OECD countries, Canada’s policy framework to deal with temperature rise and increased severe weather events includes a strong focus on emergency response and disaster recovery. The Disaster Financial Assistance Arrangements (DFAA) has been the major form of federal support, providing provinces and territories financial assistance for specific costs (emergency shelters, public infrastructure repairs, and rebuilding of businesses or homes) in the event of a large-scale natural disaster. It should be noted that provincial and territorial as well as municipal governments also bear a large part of disaster costs. With the number of disasters increasing, spending through the DFAA has increased rapidly over the past 15 years (Figure 3.4, panel A). Of the CAD 9.3 billion paid by the DFAA between 1970 and September 2024, over 60% was disbursed in the past 10 years (Figure 3.4, panel A). Historically most disaster financial assistance has been disbursed in response to floods (Figure 3.4, panel B). The 2021 wildfires and flooding in British Columbia alone required CAD 1.5 billion in DFAA payments (Exell and Parry, 2023[16]).
Source: Disaster Financial Assistance Arrangements (DFAA), Department of Public Safety and Emergency Preparedness.
Future disaster costs can be reduced through well-designed adaptation and risk prevention policies. Research has highlighted that climate-resilient infrastructure can be more cost-effective compared to constantly repairing outdated infrastructure (OECD, 2024[17]). According to the Canadian Climate Institute (2022[4]), every dollar spent on adaptation measures today provides CAD 13-15 in future direct and indirect benefits and savings. Since 2018, the federal government has committed a total of CAD 3.8 billion (or slightly over 0.1% of GDP in 2023) through the Disaster Mitigation and Adaptation Fund (DMAF) until 2033 to finance infrastructure projects designed to reduce long-term risks from climate hazards. Additionally, the federal government runs several infrastructure programs in which climate resiliency is one of the criteria, including the Canada Community Building Fund, and the Green Municipal Fund. The new Canada Housing Infrastructure Fund also provides support for stormwater systems.
Canada’s first National Adaptation Strategy (NAS) was finalised in 2023, following two years of engagement by the federal government with provincial, territorial and municipal governments, and First Nations, Inuit and Métis representatives, key experts and stakeholders. The Strategy sets out near-term, medium-term and long-term adaptation targets and objectives, including increasing disaster resilience, improving health, increasing resilience of infrastructure, protecting and restoring nature, and supporting the economy. Progress on adapting to climate-related risks will be tracked with performance indicators to ensure accountability. To outline its role in implementing the NAS, the federal government released in 2022 the Government of Canada Adaptation Action Plan (GOCAAP) with over 70 federal climate change adaptation actions. The Action Plan outlines the federal role in meeting adaptation goals, objectives and targets, and it sets out measures to address priorities over the next five years. The Action Plan targets the main focus areas of the National Adaptation Strategy: disaster resilience, health, biodiversity, infrastructure, and economy and workers. Key federal investments in climate change adaptation include:
The Disaster Mitigation and Adaptation Fund: investing CAD 3.8 billion since 2018 in projects that help communities better prepare for, and withstand, the potential impacts of natural disasters, prevent infrastructure failures, and help keep Canadians safe.
Local Leadership for Climate Adaptation Initiative: providing CAD 530 million for community-based adaptation projects as part of the Federation of Canadian Municipalities’ Green Municipal Fund.
The Wildfire Resilient Futures Initiative: CAD 285 million to improve wildfire management.
Flood hazard maps: ensuring that Canadians have access to up-to-date and high-quality flood hazard maps by investing up to CAD 164 million over five years and working with provinces and territories to increase resilience by expanding the Flood Hazard Identification Mapping Program.
Working with First Nations to develop greater climate resilience: Providing CAD 145.2 million over five years, starting in 2024-25, to work with First Nations, including by deploying structural mitigation strategies to protect communities, homes, and essential infrastructure from climate disasters.
Set to be updated every five years, the National Adaptation Strategy is accompanied by bilateral “action plans” for federal-provincial/territorial cooperation. This will support regional implementation of the Strategy and reflect the different risks and adaptation advancement in each province and territory. Together with the federal government, Canada’s provincial and territorial governments have important roles to play on adaptation in their jurisdictions, particularly where land-use planning laws, building regulations, natural resource management, health care policy and public infrastructure decisions play a key role in advancing and streamlining climate change adaptation.
There is still room for accelerating the policy push on adaptation investment. Further consideration should be given to increasing funding for climate resilient infrastructure (e.g., through DMAF or another mechanism) and making programmes more attractive. Easing application constraints for municipalities and provinces lacking resources can make it more attractive for many governments. In parallel to federal support, it is essential that provincial and municipal governments, which are responsible for a large share of key infrastructure, ensure that sufficient resources are allocated to investment in adaptation.
The private sector plays a pivotal role in adapting buildings and infrastructures to withstand climate impacts. However, government intervention is often necessary to address key barriers to private risk-based adaptation actions, such as information and data gaps, financial constraints, coordination failure, and myopic behaviour. (OECD, 2024[17]). Regulations and standards, such as building and land use codes, should also be used to mandate the use of future climate change projection data and the adoption of adaptation measures to reduce risks. Additionally, economic instruments de-risking and subsidising adaptation investments need to support private actors, notably where financing constraints are the main barrier. For instance, public-private partnerships can be effective to de-risk private investment in resilient infrastructure, either through public guarantees or co-investment (OECD, forthcoming). However, the direct provision of climate resilient public goods may be necessary in specific circumstances such as a flood barrier, due to large positive externalities and high investment costs.
3.2.2. Reducing exposure and vulnerability to flood
Better mapping and public awareness on flood risks is needed to reduce exposure and vulnerability to floods. Improving public awareness of climate-related risks can reduce the impacts of future floods by informing risk-based purchasing, investment, and adaptation decisions. A 2020 national survey suggests that 94% of Canadians living in high-risk areas are unaware of the high flood risk they face (Canada’s Task Force on Flood Insurance and Relocation, 2022[8]). In Canada, existing flood risk maps are not available or readily accessible. Many are outdated and designed for planning and engineering rather than providing relevant risk-based information for the public (The Council of Canadian Academies, 2019[12]). Furthermore, existing flood maps do not always incorporate future climate change risks. The federal government and several provinces have been working to address gaps in flood risk mapping, including to foster standardisation of approaches, improve methodologies, and expand coverage. The Flood Hazard Identification and Mapping Program (FHIMP) which started in 2021, provides funding to advance the production of flood hazard data and maps for higher risk areas.
Flood risks should also, as a rule, be disclosed to buyers of residential or commercial properties (OECD, 2023[1]). However, the disclosure of flood risk is not compulsory in Canada (Canada’s Task Force on Flood Insurance and Relocation, 2022[8]). Additionally, there are no requirements in Canada for landlords to disclose known risks (including those related to flooding) associated with property rentals, which increases exposure of vulnerable socio-economic groups. Flood risk disclosure would facilitate flood risk pricing, and it can encourage property-level flood protection.
More effective multilevel governance on land use planning and development is needed to reduce exposure to floods. Development in high-risk flood zones in Canada increased by over 60% between 1985 and 2015 (Rentschler et al., 2023[18]). Incentivising or mandating the relocation of property in flood-prone areas should in some cases be considered. Such strategy can be cost-effective to reduce economic and human losses in high risks zones. Additionally, concrete efforts are needed to effectively ban new buildings in flood prone areas and to integrate adaptation into land use planning. Provinces are increasingly using land use regulations to restrict development in high-risk areas, but enforcement remains a challenge.
Zoning laws governing land use in high-risk flood areas tend to be inconsistent across provinces or insufficiently enforced (The Council of Canadian Academies, 2019[12]). Municipalities, the main enforcers of zoning laws, lack incentives to strictly implement them because restrictions on development in high-risk areas limit economic activity and revenue collected through property taxes. Additionally, the availability of large-scale government disaster assistance may reduce the perceived urgency of strict land use enforcement among municipalities.
An independent body in charge of providing guidance on flood risk management can prevent placing more infrastructures and homes in areas with high flood risk. Such a body could be relevant at the local level, too. Municipalities could consider implementing a watershed-based approach to flood risk management. This can help align incentives across different levels of government. For instance, following devastating floods in the mid-90s, the Province of Ontario delegated the authority over development in high-risk areas to an apolitical watershed-based conservation authority. The latter provides a layer of regional oversight with the authority to disallow development in flood-prone areas that might otherwise be permitted by a local government.
Adaptation challenges are significant around Canada’s urban centres due to high population and infrastructure density. Upgrading stormwater and drainage systems can play a large role in reducing urban flood risks. The recent CAD 6 billion Canada Housing Infrastructure Fund, which includes stormwater infrastructure under its list of eligible areas for investment, provides welcome support. This said, these major investment needs necessitate additional resources. One option to generate revenues to finance stormwater management infrastructure is to implement stormwater charges, a fee added to the monthly water bill of properties based on their impervious surface area. Such charges need to be carefully assessed against housing affordability challenges (see Chapter 2). Green infrastructures, such as permeable pavements, rain gardens and green roofs, can be effective to reduce peak stormwater flows and to limit the financial risks (OECD, 2024[17]).
Improved resilience of private infrastructures requires mainstreaming climate resilience into infrastructure financing and physical investment standards (OECD, 2024[17]). Setting infrastructure resilience standards, labels and taxonomies can play a role in encouraging resilient infrastructure investment. The case for imposing regulations and standards is particularly strong when it comes to critical infrastructures, which can cause large economic disruptions such as telecommunications, transportation and energy utilities. In this regard, several welcome initiatives are underway, including the Climate Resilient Built Environment initiative and the Standards to Support Resilience in Infrastructure Program produce research, guidelines, standards and code change recommendations to factor climate risks into infrastructure design and builds. Canada's National Adaptation Strategy aims to factor in climate resilience considerations in new federal infrastructure investments.
Similarly, encouraging finance flows for climate resilient infrastructure can help address growing impacts of climate change. In this regard the Disaster Mitigation and Adaptation Fund can provide valuable support. For instance, it provided funding for the Toronto Port Lands Flood Protection project, a large-scale infrastructure initiative to protect parts of downtown Toronto from flooding by naturalizing the mouth of the Don River. Investment in flood protection is ramping in Ontario in response to increasing flood risks. Over the period 2018-2021, Ontario spent over CAD 2.5 billion in flood protection, about 40% of Canada’s total (Statistics Canada, 2023[19]).
Concrete efforts are needed to integrate adaptation into building codes and to incentivise private property level flood protection. Governments should consider providing credit-constrained individuals and businesses targeted support for adaptation investment, including through tax incentives, grants, and low interest loans. This is important for businesses and households exposed to hazards to reduce their risk of harm. In moderate-risk zones, flood-proofing new developments can minimise water damage. The federal government is allocating CAD 60 million over five years to accelerate use of “climate-informed codes” and standards for resilient infrastructure. Focus on property level flood protection measures is increasing in Canada, particularly as a form of prevention against stormwater and urban overland flooding. Some municipalities use subsidies and credits to incentivise property level flood protection. For example, Ontario's building code now requires backwater valves in new homes to prevent sewer backups. The Eco-Roof programme in Toronto has subsidised the installation of green and cool roofs since 2009. Provinces that have not yet updated their building codes to challenges emerging from climate risks need to consider including flood protection requirements.
3.2.3. Adapting to sea level rise and coastal risk
The systematic integration of sea-level rise into land use decisions and building codes can be an effective adaptation strategy. To better integrate climate change projections into coastal flood risk assessments and infrastructure planning, gaps in flood mapping coverage need to be addressed. In some cases, managed retreat or buyout and the establishment of setback zones should be considered. Provincial governments in Nova Scotia and British Columbia have started to integrate sea-level rise into their coastal planning. Examples of climate adaptation planning include especially vulnerable places, such as Les Îles-de-la Madeleine in the Gulf of St. Lawrence, which has no alternative but to engage in coastal retreat.
Reinforcing coastal infrastructure can protect ports and transportation routes from rising sea levels and storm surges, ensuring the uninterrupted flow of goods and services. Canadian provinces have adopted different types of structural coastal adaptation measures. In cities situated in the coastlines (and rivers), where the risk exposure of critical infrastructure and properties is the highest, governments have long invested in structural flood protection such as dikes and seawalls. Work on upgrades of flood defence infrastructure are underway in the Halifax Harbour Area in Nova Scotia, as part of a multi-phase adaptation strategy to protect Halifax from coastal flooding and preserve its port infrastructure. The dike system in Richmond, British Columbia, which protects low-lying areas from the Fraser River and coastal storm surges, is regularly upgraded to meet rising sea-level projections. Nature based solutions can be cost efficient to complement physical infrastructures and provide climate mitigation benefits (OECD, 2024[17]). Similarly, well preserved wetlands, combined with urban green space expansions, including parks and green roofs can be highly effective in absorbing excess water, and thereby reduce the risk of urban flooding while contributing to lower greenhouse gas emissions.
Early warning systems are an essential component of a policy response to reduce the loss of life and limit infrastructure damages from flooding. By providing timely information about hazards, early warning systems can help vulnerable regions prepare for extreme weather events, facilitating timely evacuations and mobilisation (OECD, 2019[20]). In May 2024, the federal government has expanded its early warning systems. The new Coastal Flooding Prediction and Alerting Program will allow meteorologists to issue coastal flooding alerts and forecasts across most of the country, giving early warning to emergency management organizations and Canadians about the risk of coastal flooding.
3.2.4. Addressing gaps in flood insurance
In Canada flood insurance is not mandatory and was only introduced by the insurance industry in 2015. By 2023, many homes (about 10 million out of 15 million) had overland flood insurance protection (Institute for Catastrophic Loss Reduction, 2024[21]). However, very few homes at high risk of flooding are presently covered by flood insurance. The federal Task Force on Flood Insurance and Relocation (2022[8]) estimates that about 90% of Canada’s CAD 2.9 billion average annual flood damage is concentrated in the 10% of Canadian homes (about 1.5 million) located in high-risk flood zone. Refrained by the high cost of payouts for frequent and severe flooding, insurance companies often abstain from offering flood coverage in these areas and when they do, the cost of insuring buildings in flood-prone areas tends to be prohibitive (OECD, 2023[1]). The high concentration of risks among uninsured properties contribute to a relatively low share of insured flood losses in Canada (Figure 3.5, panel A)
As most high-risk households are left uninsured, homeowners either pay out of pocket or may receive disaster assistance when catastrophic events occur. Payments under Canada’s Disaster Financial Assistance Arrangements (DFAA) have increased, with floods accounting for the bulk of federal disaster assistance funding. In effect a form of insurance subsidised by taxpayers, public disaster relief can indirectly encourage ongoing risky land use as there is limited incentive for homeowners to reduce their risk. This can also lead to continued building on floodplains because local governments and developers reap property taxes and profits, while assuming that others will bear the costs of repair. The degree of assistance provided by the DFAA to provincial governments could be adjusted based on land-use objectives.
The federal government announced in Budget 2023 and Budget 2024 the intent to establish a subsidiary to deliver flood reinsurance to households at high-risk of flood. In partnership with property and casualty insurers, it aims to ensure the availability of affordable insurance in high-risk areas, while offering a financial safety net in case of catastrophic flooding. The details of the scheme are still under discussion. In supporting access to affordable disaster insurance, government could maintain affordable premiums while excluding coverage for new developments and banning new builds in high-risk floodplains. The insurance premium could be adjusted progressively over time (i.e. the subsidy should be reduced) to reflect flood risk and encourage homeowners to reduce their risks, while providing support to low-income households. The programme could also offer reduced risk premia (or a subsidy) to homeowners adopting flood resilience measures to incentivise risk reduction through the premium’s price signal.
Share of economic losses insured by type of risk, 2000-19
Note: The chart shows the share of economic losses insured based on the midpoint of two estimates: the share of total losses that were insured, and the average of the share of insured losses across each individual event. Presenting the midpoint of the two estimates mitigates bias in the data from events with large total losses and low reported insured losses.
Source: OECD (2021[22]). The graph shows OECD calculations based on data provided by Swiss Re sigma and PCS. Reported economic losses are included only for events for which an insured loss estimate is also available.
Government interventions directed at increasing coverage and affordable premiums need to be combined with strong incentive for risk reduction through adaptation. Risk reduction is critical to strengthen the insurance sector resilience while safeguarding insurance policies’ affordability (OECD, 2023[23]). Policies to improve public awareness of flood risks and prevent new constructions in high-risks areas are necessary for a well-functioning insurance market due to their key role in facilitating effective risk reduction. There is room for improving flood risk transparency, including through compulsory disclosure of flood risks in property transactions. Land-use policy should ensure that development in risky areas is banned. In high-risk floodplains and coastal areas exposed to rising sea levels, relocation must be considered. After repeated floods in the city of Lismore, for example, the Australian and New South Wales governments developed a programme to support managed retreat (OECD, 2024[17]).
Efforts to extend coverage of flood insurance should go hand in hand with a more effective risk sharing between private and public actors. Many countries have faced similar challenges in switching from a private insurance system with public ex-post compensation toward a more mixed public-private insurance mechanism. Hence Canada can learn from solutions developed elsewhere (see Box 3.2). For instance, in France the inclusion of mandatory flood insurance in home insurance contracts has improved distribution of risk while also facilitating the role of the private sector in risk insurance. Compulsory flood risk insurance for all properties allows to pool risks more effectively. A well-designed arrangement can also significantly reduce the fiscal burden and the volatility of payments in addition to providing significantly broader coverage. The scope of public reinsurance should be well defined. It could also be adjusted based on land-use objectives. For example, the United Kingdom limits reinsurance coverage for developments constructed after 2009, while in the United States coverage by the National Flood Insurance Program is only provided to communities which have set flood management conditions such as building and floodplain management standards.
Private insurance plays a large role in supporting losses related to floods in the United Kingdom and France (Figure 3.4). Both countries have taken key measures to encourage take up of disaster insurance. For instance, in France private insurers must include insurance against flood risk in property insurance policies. Coverage is funded from a fixed share of all premiums (regardless of degree of flood risk exposure). Insurers in turn benefit from government-backed reinsurance up to a certain threshold. The “Catnat” system, a state guarantee, ensures that damages from extreme events can be covered. A key advantage of the French system is that it combines large coverage and affordable premiums. By sharing risks with private insurers, the system also presents important benefits in terms of cost effectiveness.
In the United Kingdom, property insurance policies include coverage for flood risks. Insurers are required to contribute to a reinsurance scheme called Flood Re through a levy on all residential property insurance policies. The reinsurer uses funds raised through the levy, and premiums collected for reinsurance coverage, to provide more affordable insurance for high-risk properties. Under the scheme, the cost of subsidising insurance premiums for high flood-risk properties falls partially on homeowners in lower-risk areas. If insurers pass on some of the cost of the Flood Re levy, overall costs of insurance for lower flood-risk properties are slightly more expensive than they otherwise would be. Coverage is available only for homes built before 2009, discouraging new development in high-risk areas. Flood Re aims to eventually exit the market (by 2039) by reducing risk among high-risk properties to levels where risk-based premiums for those properties would be affordable.
Source: OECD (2023[1]), OECD (2024[24]), Canada’s Task Force on Flood Insurance and Relocation (2022[8]).
3.2.5. Reinforcing risk prevention to reduce impacts from wildfires
The annual costs of wildfire management agencies have increased by CAD 150 million per decade since the 1970s, reaching between CAD 800 million to CAD 1.4 billion annually over the last 10 years (Natural Resources Canada, 2024[25]). It is estimated that wildfire suppression spending in the provinces of Alberta, British Columbia, and Ontario would need to double in the second half of this century to maintain the current levels of fire response success (Hope et al., 2016[26]). Fire suppression operations have been aided by advances in wildland fire research and the development of key operational tools. The Canadian Forest Fire Danger Rating System, which relies on meteorological data, is widely used to assess fire risks and predict fire behaviour, informing strategic decisions in wildfire management. Artificial Intelligence (AI) is starting to be used in wildfire management, though still in relatively early stage. For instance, in 2022, Alberta Wildfire started using an AI-powered tool to better predict initial wildfire behaviour.
Re-balancing policy efforts from emergency response toward long term investment in proactive adaptation strategies can be a cost-effective strategy for enhanced wildfire resilience. The need for additional efforts is increasingly recognised by the authorities including in the 2024 Canadian Wildland Fire Prevention and Mitigation Strategy. Initiatives such as FireSmart Canada focus on enhancing community resilience by promoting practices that reduce risks and improve public safety, notably through the creation of defensible spaces around structures and implementation of fire-resistant landscaping. However, current industrial, land and infrastructure planning processes often do not take wildland fire risks into consideration. In forested regions a better integration of critical infrastructure—such as power grids, transportation networks, and communication systems— can enhance resilience to wildfires. For example, ensuring that critical infrastructure has adequate firebreaks could significantly reduce the risk of damage. This would help safeguard essential services during wildfire events and contribute to overall disaster resilience.
Development in fire-prone areas, especially in wildland-urban interfaces, must be limited to reduce future risks and firefighting costs. Stringent land-use planning regulations for new developments need to be complemented by fire-resistant building codes in lower risk zones. Insurance coverage against wildland fires is higher than for floods as it is widely included in home insurance policies (see Figure 3.3). However, rising damages from wildfires are increasingly impacting the property insurance market, especially in high-risk areas. Insurers are increasingly reluctant to cover properties in regions prone to wildfires, resulting in higher premiums or the complete withdrawal of coverage in some areas. For example, in Alberta, wildfire-prone communities are facing soaring insurance costs, mirroring challenges seen globally in high-risk fire zones like California and Australia. The governments should consider incentivising private insurers to remain in the market by funding adaptation measures that reduce risks, such as retrofitting homes, mandating space standards around properties, or through relocation.
Enhanced landscape management can reduce the availability of fire-prone vegetation (OECD, 2023[27]). These measures reduce the risk and intensity of wildfires, helping protect communities, infrastructure, and natural resources. Additionally, incorporating Indigenous knowledge and traditional land management practices, which have long included fire management techniques, can strengthen current wildfire prevention efforts and provide a more holistic, sustainable approach to managing wildfire risks.
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