Why no action on climate change is not an option
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As the world’s focus turns to building a sustainable recovery after the global pandemic, it could well be argued that the COP26 climate conference in Glasgow later this year carries more weight – and a greater sense of urgency – than previous summits of this kind.
While no country is immune to the adverse effects of climate change, some nations will suffer worse than others. New Swiss Re Institute research quantifies, for the first time, the potential fallout for the global economy and rates which countries would be most and least affected, as well as best and worst placed to cope.
The ability to adapt
The Economics of Climate Change report pulls together information about the physical risks of wetter or drier climates, each country’s ability to adapt to these changes and the likely adverse impact of climate change on GDP. This produces a ranking of which countries will be worst hit and stress-tests the impact of unmitigated climate change on economies around the world.
The 48 countries ranked by Swiss Re Institute account for about 90% of the global economy. Asia as a region will be the hardest hit, with the five worst-affected countries being Indonesia, India, the Philippines, Venezuela and Thailand.
Much of the brunt is borne by emerging economies. As well as lacking the resources and finance to adequately adapt and mitigate the impact of climate change, many are already located in hotter parts of the world. And with economies more dependent on industries like agriculture, rising temperatures will hit their GDP even harder.
In contrast, advanced economies like Finland, Switzerland, Austria, Denmark and Germany are comparatively less affected by climate change – and have greater capacity to adapt. But they are certainly not untouched.
The economic fallout
The Climate Economics Index suggests that the global economy stands to lose between 11% and 14% of GDP by mid-century if today's climate trends continue, compared to a world without climate change. Based on the current trajectory of a 2.0-2.6°C temperature rise, China’s economy could be 18% smaller, the US’s 7% and the Euro area 8% by mid-century.
Under a more severe scenario, with higher temperature increases and no action on climate change, the loss figure could reach as much as 18%.
In this scenario, OECD economies could lose around 11% − this is similar to the effect of the pandemic in the first half of 2020. But, unlike the comparatively transient impact of COVID-19, climate change is permanent and long-term.
“We have a vaccine for the pandemic, and that vaccine is being rolled out,” says Saner.
“So, whether it’s this year or next, the pandemic has an expiry date. Climate change does not. And even if we had carbon capture and storage techniques available, with which we could drop emissions quickly, oceans will continue to warm and global temperatures rise for quite a while because the proverbial climate ship is in motion.”
What's clear is that climate change is already happening. And even if the goal of the Paris Agreement to limit warming to below 2°C is met, there will be a cost to economies. By the middle of the century, GDP could be around 4.2% lower than in a world where climate change had never happened.
"Just because we are already seeing the costs of climate change doesn't mean we shouldn't do more to mitigate it. The Paris agreement remains the best outcome for the global economy given where we are today", Saner says.
Time for action and a new mindset
For the insurance industry, climate change comes with its own challenges and opportunities. Insurers and their reinsurance partners have an important role to play by supporting and enabling investments in sustainable infrastructure to mitigate climate change impacts.
The industry already has a lot of data that can help decision-makers better understand risk and impact. By repurposing its risk technology and knowledge, it can support economies and societies to make smarter decisions.
Most importantly, all relevant public and private actors from government and business need to take urgent action – and do so collectively.
There are already encouraging commitments to go carbon neutral from countries representing more than 65% of global carbon dioxide emissions and 70% of the world’s economy. Many companies, too, are putting sustainability at the top of their corporate agendas.
But a fundamental mindset change is also needed, from one that focuses mainly on the 'cost' of the changes we need to make to one that recognises their huge benefits.
“The real cost is the human and social cost of doing nothing,” Saner concludes. “We need to see the necessary changes not as costs but as investments in the future – the price we are paying to have a prosperous future.”