Why emissions cuts may make sense – economically

Global warming impacts the value of global financial assets. The higher the temperatures, the more assets at risk worldwide, finds an economic analysis.

First Look

At the global climate summit in Paris in December 2015, 195 countries agreed to try to keep global temperatures from rising by "well below" 2 degrees Celsius (3.6 Fahrenheit) above what they were during pre-industrial times.

Even this agreed-upon amount of warming by 2100, according to a new economic analysis, would jeopardize $1.7 trillion of global financial assets.

If global temperature rose by 2.5 degrees C by the end of the century, according to predictions, there is a 1 percent chance that this could threaten $24 trillion, or up to 17 percent of global financial assets in 2100, as Environmental Finance reports.

“Limiting warming to no more than 2 degrees C makes financial sense to risk-neutral investors – and even more so to the risk averse,” wrote economists from the London School of Economics and Political Science and Vivid Economics, an economic consultancy, in a letter published Monday in Nature Climate Change.

They cited rising temperatures and the related droughts, floods, and heat waves that are expected to become more severe and cause financial havoc by destroying buildings, bridges, roads, agricultural productivity and dislocating people.

The authors didn’t specify which industries are most threatened, according to Reuters.

Economists also factored in the costs of transitioning away from carbon-intensive industries to limit global warming to below 2 degrees C and found that the risk becomes worth $2.2 trillion in global financial assets.

“When we take into account the financial impacts of efforts to cut emissions, we still find the expected value of financial assets is higher in a world that limits warming to 2 degrees C,” said Dr. Dietz, according to Environmental Finance. “This means risk-neutral investors would choose to cut emissions, and risk-averse investors would be even more keen to do so,” he said.

The World Economic Forum in January said a catastrophe caused by climate change is the biggest potential threat to the global economy in 2016, reported The Guardian.

If the world doesn’t prepare and adapt for a different world, climate change could have a bigger impact than the spread of weapons of mass destruction, water crises, mass involuntary migration, and a severe energy price shock, it reported.

“Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks,” said Cecilia Reyes, Zurich’s chief risk officer, to the Guardian.

Meanwhile, geopolitical instability is exposing businesses to cancelled projects, revoked licences, interrupted production, damaged assets and restricted movement of funds across borders. These political conflicts are in turn making the challenge of climate change all the more insurmountable – reducing the potential for political cooperation, as well as diverting resource, innovation and time away from climate change resilience and prevention,” she said.

Stephanie Pfeifer, head of the London-based Institutional Investors Group on Climate Change, which represents 120 investors controlling more than $13 trillion in funds, told Reuters that the Nature analysis is "yet more evidence that unabated climate change would negatively impact economic growth and investment returns over the long term."

Investors, she said, should pressure company boards to disclose risks from climate change and to ensure that their businesses are on track to limit rising temperatures.