Wednesday, April 6, 2016

The Economics of Climate Action

The imperative to act on climate change may be a moral call for us to act on behalf of future generations but it is also a pragmatic present day matter of fiscal responsibility. A slew of reports corroborate the simple math that there is a multi-trillion dollar benefit from acting on climate change. These reports show that if we act to reduce the impacts of climate change we could significantly diminish the financial losses, while failing to act will cost us trillions. 

A cost benefit analysis reveals that the benefits of acting on climate change far exceed the costs. The Bank of England, the World Bank and others have warned that climate change poses a serious risk to the global economy. An LSE cost benefit analysis supports the benefits of climate action as does a White House report. Indeed the recent Global Risks Report singled out climate change as the biggest threat that we face. Recently a couple of studies quantified some of the risks associated with climate change.

A recent study suggests that losses from climate change could cost the global economy as much as 20 percent of its value. According to the International Energy Agency (IEA), the costs of addressing the energy costs of climate action is pegged at 16.5 trillion by 2040.

While this price tag may appear to be prohibitive it is nothing compared to the long term impact of runaway climate change. When spread over the 187 governments that made climate pledges at COP21 that amount does not seem quite as daunting. At the Paris meeting government's pledged a total of $13.5 trillion to meet their goal of keeping temperatures from rising no more than 2 degrees Celsius (3.6 degrees Fahrenheit) above preindustrial times. The new upper threshold limit agreed to in Paris is 1.5 degrees C above preindustrial norms. The $13.5 trillion is only $3 trillion short of the 16.5 trillion needed to reach the stated goal outlined in the Paris deal.

An analysis from Ceres indicates that the cost of managing climate change will be approximately $1 trillion annually. Last year Citibank reported that it will cost $44 trillion worldwide by 2060 to mitigate the costs of climate change under the business as usual scenario. However, Citibank also reported that slowing climate change could save $70 trillion. That translates to a net savings of $26 trillion.

The costs of climate change are being increasingly well documented. This includes everything from reduced productivity, diminished agricultural yields and destroyed infrastructure from extreme weather events.

A new study, published in Nature Climate Change, quantifies the financial risks of doing nothing to manage climate change at between $2.5 trillion and $24 trillion.

"Our work suggests to long-term investors that we would be better off in a low-carbon world," said Prof Simon Dietz of the London School of Economics, the lead author of the study.

A study published last fall suggests that productivity alone could drop as much as 23 percent globally by 2100 due to climate change. This study does not factor a number of other losses (eg declining sales and reduced investor returns) that are expected in a world ravaged by climate change..

Mark Campanale of the thinktank Carbon Tracker Initiative as saying that the costs could be much higher than these estimates: “It could be a lot worse. The loss of financial capital can be a lot higher and faster than the GDP losses [used to model the costs of climate change in the study]. Just look at value of coal giant Peabody Energy. It was worth billions just a few years ago and now it is worth nothing.”

As reported by Grist, the authors of the LSE and Vivid Economics study suggest that climate change can either reduce the value of an asset or destroy the value altogether.

Early last fall the Republican controlled House voted in support of what is called the RAPID Act which including a provision to prevent the Environmental Protection Agency (EPA) from assessing the cost of climate change causing carbon.

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