Estimating global economic impact of climate change and the cost of GHG mitigation is difficult, but governments and private investors would have to work together to deliver results
“We’re staring down a climate bubble that poses enormous risks to both our environment and economy. The warning signs are clear and growing more urgent as the risks go unchecked. We need to act now, even though there is much disagreement…on how to address this issue while remaining economically competitive”. The author goes on, “… right to consider the economic implications. But we must not lose sight of the profound economic risks of doing nothing.” A tree-hugging environmentalist, you guess. In fact this is Henry Paulson, former Treasury Secretary of USA and a red in tooth and claw capitalist, recently writing in the New York Times.
In Hong Kong, on the other side of the world, a similar debate was being waged as investors and policy makers gathered on June 24 for the Banking Environment Initiative Forum. The occasion saw the release of a report, “Climate change: Implications for investors and financial institutions”, by a group of respected names, including Cambridge University and United Nations Environment Programme (UNEP). The report was based on the assumptions and conclusions of the Fifth Assessment (AR5) prepared by The Intergovernmental Panel on climate change (IPCC). It emphasized that climate change will impact all sectors of the economy.
In order to keep the temperature from rising by less than 2o C, governments are likely to introduce policy measures to reduce greenhouse gas emissions. The consequences for investors could be dramatic: values of certain assets, such as coal-based power plants or fossil fuel extraction facilities, may fall sharply because of constraints on their businesses. On the other hand, new opportunities may emerge for businesses. IPCC estimates that energy sector would need between US$190 and 900 billion investment annually through 2050; however, investment will shift from fossil-fuel to renewable energy and energy efficiency. In fact, almost half of the investments in energy sector in 2012 were in renewables.
Low elevation coastal zone would be particularly impacted. This area constitutes around 2 per cent of land area but 10 per cent of global population. By 2010, 270 million people—double the number in 1970—were exposed to extreme sea-level events (defined as sea-level that has 1 per cent chance of being exceeded); US $13 trillion of assets were exposed to extreme sea-level events. This has serious implications for the insurance sector. Meanwhile, it throws up opportunities for companies in flood management.
Changing rainfall patterns will impact agriculture and food supply. Variable water supply may even impact power generation from fossil-fuel source and nuclear power (on account of their need of water for cooling), and hydro-power.
One key issue is that estimating the global economic impact of climate change and the cost of GHG mitigation is difficult. Nevertheless, the scale of the challenge is so large the governments would need to rely on private investors to provide capital to address the impact of climate change. Investors in turn would look to governments for a stable policy framework and incentives to offset huge and difficult-to-quantify risks.