Feast or famine? The financial risks of climate change

Credit: IPCC

The facts of climate change

At this point in time, the basic facts of climate change are not disputable in the least. Careful planet-wide observations by NASA and others have confirmed that 2018 was the fourth-warmest year in recorded history. The only warmer years were 2016, 2017 and 2015, respectively, and 18 of the 19 warmest years in history have occurred since 2001. Countless observational studies and supercomputer simulations have confirmed both the fact of warming and the conclusion that this warming is principally due to human activity. These studies and computations have been scrutinized in great detail by a climate science community numbering in the thousands, representing all major nations, as summarized in the latest report by the Intergovernmental Panel on Climate Change (IPCC).

Climate change skeptics continue to raise objections, claiming that there is “scientific evidence” that this mainstream consensus on climate change is wrong, but these objections have been debunked many times. See this Math Scholar blog for some examples.

Scientific consensus versus public views on climate

At this point in time, at least 97% of climate science researchers agree with the central conclusion that the Earth is warming and that human activity is the primary cause. This statistic is based on multiple in-depth surveys of thousands of recently published papers in the climate science field. Further, this consensus is supported by official statements from the American Association for the Advancement of Science, the American Chemical Society, the American Geophysical Union, the American Meteorological Society, the American Physical Society, the Geological Society of America, the U.S. National Academy of Sciences and numerous other scientific societies worldwide.

In contrast, large numbers of Americans in particular continue to deny even the most basic facts. In a 2017 Pew Research Center survey, 23% denied that there is any solid evidence that the Earth has been warming, and of those who acknowledge warming, nearly half doubted that it is due to human activities.

So why are so many skeptical of the scientific consensus? According to a separate 2017 Pew Research Center survey, only 27% agreed that “almost all” scientists are in agreement; 35% said only “More than half,” and 35% said half or fewer. But even more disturbingly, only 32% agreed that the “best available scientific evidence” influences the climate scientists’ conclusions; 48% said only “some of the time”, and 18% said “not too often or never.” These results underscore a severe level of distrust of scientists in general and climate scientists in particular by the public.

Climate change is already having a major impact

According to the latest IPCC report, impacts on natural and human systems are already occurring, and even a warming of 1.5o C, which at this point can hardly be averted, will have very serious consequences, including more extreme temperature events, more instances of heavy precipitation, more severe droughts, rising sea levels damaging cities and agricultural lands, as well as enormous stress on ecosystems worldwide.

An October 2019 Scientific American article listed some of the frightening developments, just in the previous 12 months:

  1. In December 2018, the World Health Organization said that fossil fuel emissions are “a major contributor to health-damaging air pollution, which every year kills over seven million people.” It added that extreme weather events, which have been linked to human-caused climate change, are “a clear and present danger to health security.”
  2. Also in December 2018, the Global Carbon Project reported that global CO2 emissions reached an all-time high in 2018, up more than two percent after three level years. What’s more, additional increases are likely in 2019.
  3. In April 2019, a NASA-funded study found the mass loss of ice discharged into the ocean from Greenland glaciers had increased by a factor of six since the 1980s. Partly as a result, mean sea level has risen nearly 14 millimeters since 1972, with 7 millimeters in the past eight years. Subsequently, in July 2019, a severe Arctic heat wave resulted in 12.5 billion tons of ice melting into the ocean on a single day, the largest single-day loss on record.
  4. In May 2019, a United Nations biodiversity panel reported that over one million animal and plant species are threatened with extinction in the next few decades, and, further, that rates of extinction are “accelerating.”
  5. In September 2019, an IPCC report concluded that warming oceans, melting ice, and rising sea levels are already affecting 10 percent of the world’s population that lives in low-lying coastal areas, and that negative impacts will greatly worsen in the coming years and decades.
  6. In October 2019, California staggered through its third consecutive catastrophic wildfire season, with thousands of fires incinerating tens of thousands of acres, and, once again, causing billions of dollars in damages. This is in spite of the unprecedented step of pre-emptively shutting off power to large portions of the state in an effort to prevent downed power lines from generating more fires, a step that in effect reduced the world’s premier high technology leader and fifth largest economy to third-world status. The consensus of scientists is that the dry autumn weather and winds that precipitated these fires are exacerbated by climate change, with the dismal prospect for even more wildfires and power blackouts in the future.

Managing the financial risks of climate change

In October 2019 Citigroup published a report titled Managing the financial risks of climate change, which analyzes two areas of financial risk related to climate change: (a) financial risks associated with effective policies, public efforts and private efforts to limit greenhouse gas emissions and resulting climate change; and (b) financial risks associated with a failure to effectively address these challenges. As the report notes, “Mitigation risk is the price of success in the fight against global warming. Physical risk is the price of failure.” Mitigation risks are primarily stranded asset risks — the risks of a sharp decline in the value of assets tied, say, to fossil fuel production. Physical risks include the risks of asset destruction due to climate change: wildfires, heat waves, hurricanes, cyclones, droughts, floods, disease and species extinction.

The Citigroup report notes that the future path to a carbon-free future is hotly contested. At one extreme, Blakers and Stocks of the Australian National University argue that solar and wind power will completely replace fossil fuels within 20 years. At the other extreme, James Temple, writing in MIT Technology Review, argues that at the current rate it will take 400 years to transform the energy system to a carbon-free system.

If the Balkers-Stocks scenario materializes, then vast coal, oil and gas assets will soon be stranded, and investors in stocks and bonds tied to these industries will soon be stuck with severe losses. There are some indications that this may already be happening. For example, on 6 November 2019, the stock of Chesapeake Energy, a prominent shale gas producer, plunged to a 20-year low, after warning that it might not be able to outlast the current wave of low fuel prices. On the other hand, if the Temple scenario is correct, then society is likely to see average global temperatures increased beyond the 2o C level that is thought to be close to a “tipping point,” beyond which physical risks and related financial losses are expected to be enormous.

Either way, both types of risk have the potential to be huge, possibly the largest risks ever faced by governments, financial organizations and society at large in the modern era.

For additional details, see the Citigroup report.

A call to action: Climate change as a source of financial risk

In April 2019, the Network for Greening the Financial System (NGFS), a collaboration led by several European central banks and supervisors, released a report titled A call for action: Climate change as a source of financial risk. Noting that climate change is a source of significant structural change in the economy and financial system, it summarizes the potential risks and then issues a call to action. The report makes these specific recommendations, among others:

  1. Integrate climate-related risks into financial stability monitoring, by assessing the risks and integrating them into prudential supervision. This includes engaging with financial firms to ensure that climate-related risks are understood and incorporated into their strategies.
  2. Integrate sustainability factors into portfolio management. This includes incorporating sustainability factors into the management of government pension funds and reserves.
  3. Make climate change risk assessment data available in a public data repository.
  4. Build awareness and share technical assistance. This includes setting up working groups to assist others in using data.
  5. Build intellectual capacity and technical knowledge necessary. This includes working with stakeholders in governments and private industry to incorporate climate-related factors into financial risk analysis.

For additional details, see the NGFS report.

“How dare you?”

So where do we go from here? Sixteen-year-old Swedish activist Greta Thunberg said it best in her eloquent remarks to the 2019 U.N. Climate Summit (excerpt):

You have stolen my dreams and my childhood with your empty words. And yet I’m one of the lucky ones. People are suffering. People are dying. Entire ecosystems are collapsing. We are in the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you!

For more than 30 years, the science has been crystal clear. How dare you continue to look away and come here saying that you’re doing enough, when the politics and solutions needed are still nowhere in sight.

You say you hear us and that you understand the urgency. But no matter how sad and angry I am, I do not want to believe that. Because if you really understood the situation and still kept on failing to act, then you would be evil. And that I refuse to believe.

The popular idea of cutting our emissions in half in 10 years only gives us a 50% chance of staying below 1.5 degrees [Celsius], and the risk of setting off irreversible chain reactions beyond human control.

Fifty percent may be acceptable to you. But those numbers do not include tipping points, most feedback loops, additional warming hidden by toxic air pollution or the aspects of equity and climate justice. They also rely on my generation sucking hundreds of billions of tons of your CO2 out of the air with technologies that barely exist.

So a 50% risk is simply not acceptable to us — we who have to live with the consequences.

To have a 67% chance of staying below a 1.5 degrees global temperature rise – the best odds given by the [Intergovernmental Panel on Climate Change] – the world had 420 gigatons of CO2 left to emit back on Jan. 1st, 2018. Today that figure is already down to less than 350 gigatons.

How dare you pretend that this can be solved with just ‘business as usual’ and some technical solutions? With today’s emissions levels, that remaining CO2 budget will be entirely gone within less than 8 1/2 years.

There will not be any solutions or plans presented in line with these figures here today, because these numbers are too uncomfortable. And you are still not mature enough to tell it like it is.

You are failing us. But the young people are starting to understand your betrayal. The eyes of all future generations are upon you. And if you choose to fail us, I say: We will never forgive you.

We will not let you get away with this. Right here, right now is where we draw the line. The world is waking up. And change is coming, whether you like it or not.

[This article incorporates some material from a Math Scholar blog. See that blog for some additional details.]

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