The Economics of Climate Change: Impacts for Asia

The cost of climate change will have significant impact to the global economy

In addition to the material impact on our landscape and biodiversity, climate change is of increasing concern to regulators, businesses, investors and insurers. This is due to the significant risks and impacts to both advanced and emerging markets. Unmitigated, climate change will lead to large economic losses across the globe.

Scenarios by the Swiss Re Institute quantifies the impacts of no action

The Swiss Re Institute has developed a Climate Economics Index to measure how unmitigated climate change could impact 48 of the world's economies (90% of global GDP). The index uses a ranking system based on the expected economic outcomes, vulnerability to extreme weather risks and also factors in existing adaptive readiness. Multiple climate scenarios are modelled: achievement of the Paris Agreement target of 1.5°C, an increase of 2-2.6°C and severe increase of 3.2°C by 2050.

The scenarios show that initially, markets continue to enjoy similar growth rates as in the past, with the emerging economies experiencing higher levels of growth than advanced economies. However, with temperatures slowly rising, economic impacts start to become more noticeable, especially in the second half of the century.

Ultimately, all economies stand to lose from the impacts of climate risks, but some more than others. The most impacted regions include emerging Asia, the engine of growth for the global economy, and oil producing countries. Countries in southeast Asia, Latin America, the Middle East and Africa also score relatively low in terms of vulnerability to physical risks and low levels of adaptative capacity.

The world economy could lose more than 18% of current GDP by 2048 if no action on climate change is taken. The Asia economy would be 26.5% smaller while ASEAN countries could lose 37.4%.

Table 1: Mid-century GDP changes with different temperature rises and economic impact severity, relative to a no-climate change world.

Estimated impacts to Asia

China and India, the world's two most populated countries, rank relatively weak compared to the rest of the world, due to projected heavy productivity loss resulting from heatwaves and to date, limited adaptive capacity. But with rising investment in green energy and carbon capture, China is set to quickly close any adaption capability shortfall.

Unsurprisingly, the scenarios show vulnerable ASEAN countries will be impacted the most in the region. In our most severe scenario (3.2°C temperature rise and assumed most extreme physical outcomes), ASEAN markets would lose about 37% of GDP by 2048. Indonesia, Malaysia, the Philippines, Singapore and Thailand would lose economic output totaling more than seven times their 2019 GDP by 2050. 

A unique example in Asia is Singapore, which, as a small open island country, is at high risk of multiple impact channels (eg. sea level rise, heat stress, reduced tourism revenues), but its readiness to combat the adverse effect of climate change puts it in good stead to show resilience on this front.

Table 2: Climate Economics Index: mid-of-century.

How insurance can help to minimise loss and de-risk

Insurance is an important tool to help reduce and manage risks, providing protection against business disruption, loss and the associated costs caused by extreme weather and climate related events.

Insurers are able to provide solutions for both the private and public sector - protecting assets, ensuring business continuity and enabling investment of both public and private funds. Swiss Re not only offers risk transfer capacity to absorb the impact of extreme events, but also shares knowledge and expertise with clients and partners.

For example, our Marine business is helping decarbonise the supply chain by leading the creation of an industry alliance around reducing carbon emission for shipping as an expansion of the Poseidon Principles. We have also improved our tracking of ship owners’ scrapping activities to prevent granting insurance cover to unsustainable practices and encourage a more circular economy. Digitisation initiatives also improve supply chain transparency and reduce waste.

With increased urbanisation, adapting communities to physical risks is critical. Insurance assists in building the resilience needed. In India, we partnered with Tata AIG General Insurance to provide India's first parametric insurance protection in Nagaland state, which is susceptible to damage from heavy rainfall. The cover protects the communities from excess rainfall events that can lead to severe flooding, with payout features that allocate funds to where losses occur in proportion to the amount of recorded rainfall. The application of new data and technology enables smarter risk taking and underwriting, which in turn reduces the protection gap.

In Thailand, Swiss Re has supported farmers for a number of years with the Thai Rice Insurance Scheme, which compensates farmers for losses from weather events. Now expanded to more crops, this program helps farmers build resilience by supplementing their income shortfall and covering the cost of inputs that enable them to sustain their livelihoods.  

Swiss Re commitments

The private sector also has a responsibility to take action to reduce greenhouse gas emissions and to help lead the global transition to a low-carbon, climate resilient economy. Swiss Re is Co-Chair of the World Economic Forum's Alliance of climate leaders; a worldwide coalition of CEOs from across industry sectors, committed to delivering concrete climate solutions and innovations in their practices, operations and policies.

Swiss Re has been Greenhouse Gas neutral since 2003 and we are on track to bring our operational footprint to net zero by 2030, and all investment and underwriting interests to net zero by 2050. We also provide insurance solutions to protect natural assets and enable more nature-based solutions, as nature is a highly effective climate risk mitigator. Our inventory of sustainable solutions continues to develop, including our Biodiversity and Ecosystem Services Index, which helps to identify vulnerable areas, but we need more joint public-private research partnerships for better diagnosis and management of the multi-dimensionality of climate risks.

The public sector can enable more private sector contribution with financial policy that reduces short-term bias, demands transparency of climate risks and supports sustainable infrastructure and green investment. Further government incentives for innovation and scaling of low-carbon and nature-based solutions will help grow these segments as commercially sound and sustainable alternatives.

Conclusions

The case for urgent climate action is clear. Encouragingly, by early 2021, countries representing more than 65% of global carbon-dioxide emissions and more than 70% of the world economy had pledged ambitious commitments to become carbon neutral.

Whilst world attention remains focused on the public health emergency created by the COVID-19 crisis, climate change is a continuous threat, also with significant longer-term impacts, that cannot be ignored.

Emerging markets are the global growth engine, but many of these countries, particularly in the ASEAN region, are both heavily exposed to the physical risks of climate change and inadequately resourced to adapt. Public / private partnerships are critical to enable effective risk management and resilience building initiatives. With private sector leadership and robust public policy, our combined ability to adapt and mitigate these risks increases significantly, as the scenarios show how this is indeed a global challenge we have to address together. 

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Climate risk - how can we be more resilient? Focus on Asia Pacific region

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