What could go wrong? How $38tr in climate damages could knock a fifth off global income
Major new analysis from the Potsdam Institute warns climate impacts through to 2050 could do significantly more economic damage than previously expected
How bad could it get? One of the biggest uncertainties surrounding climate change is precisely how severe climate impacts could prove to be. Scientists have become increasingly adept at working out how increasing concentrations of greenhouse gases will translate into higher average temperatures – climate models have proven to be remarkably accurate in recent decades. But what is less clear is how this global warming will translate into increased weather extremes and how these extremes will then impact hugely complex human infrastructure, agricultural systems, and the economies they underpin. Will climate change prove to be a hugely challenging but ultimately navigable source of disruption, or a catastrophic threat to geopolitical stability and an existential crisis for human civilisation? The truth is no one knows for sure.
Today a major new peer-reviewed report from the Potsdam Institute for Climate Impact Research (PIK) published in the journal Nature provides the latest addition to this long-running debate, and it makes for frankly terrifying reading.
The study represents one of the most sophisticated attempts to date to estimate the economic impacts that will result from rising temperatures over the coming decades.
To date, most studies have tended to base calculations for future economic damages on the national impacts that are expected to result from anticipated increases in average annual temperatures through to the end of the century. Under worse case scenarios based on current emissions trajectories, temperatures rise by 3C to 4C and economic impacts are pretty disastrous for many countries. Under various net zero scenarios, temperatures rise by 1.5C to 2C and economic impacts are much more manageable.
But today’s report takes a much more granular and empirical approach. It assesses the actual fallout from climate-related impacts on economic growth in over 1,600 subnational regions worldwide over the past 40 years, and then marries that analysis with the latest state of the art climate impact projections through to 2050. As such, the researchers were able to better project the likely impact of changes in temperatures and rainfall patterns, while reducing some of the uncertainties associated with projections that run deep into the second half of the century.
The headline conclusion is that under a central scenario the global economy could face $38tr a year of climate damages a year by 2050, which would knock 19 per cent off projected per capita incomes. Such impacts are likely to already be locked in, even if the world now moves quickly to curb greenhouse gas emissions. Under worse case scenarios, climate damages could reach $59tr in 2050 and incomes could be 60 per cent lower than expected.
“Strong income reductions are projected for the majority of regions, including North America and Europe, with South Asia and Africa being most strongly affected,” said PIK scientist and co-author of the study, Maximilian Kotz. “These are caused by the impact of climate change on various aspects that are relevant for economic growth such as agricultural yields, labour productivity or infrastructure… We find that economies across the world are committed to an average income loss of 19 per cent by 2049 due to past emissions. This corresponds to a 17 per cent reduction in global GDP.”
The good news, such as it is, is that the projected reductions in incomes and GDP are relative to a baseline without climate impacts. That means climate impacts would likely result in the global economy being considerably poorer than it could otherwise have been, but would not lead to a permanent recession. Given the historic rule of thumb that global GDP doubles every quarter century, economic development would continue, just at a considerably slower pace than if climate change was brought under control.
The bad news is the authors fear their estimates could prove to be conservative. The projected damages are mainly the result of rising average temperatures and changes in rainfall and temperature variability. But other weather extremes that are harder to model, such as storms or wildfires, could result in higher economic costs. The study also assumes that over time economies start to adapt to more intense climate impacts, serving to curb the resulting negative economic impacts. As climate scientists have repeatedly warned, there are plausible scenarios where some regions find it near impossible to adapt and development is thrown into reverse. Such outcomes would trigger huge geo-political risks that could impact the entire global economy.
Similarly, the projections in today’s report assume government’s start to deliver on their climate targets and carbon emissions fall sharply in the coming decades. Under worse case scenarios where emissions keep rising in line with historic trends, the projected economic impacts become much worse. “Reducing emissions to keep warming to 2C could limit the average regional income loss to 20 per cent compared to 60 per cent in a scenario of unmitigated emission increases by the end of the century,” said Kotz. Reductions in projected incomes of 60 per cent would see future GDP growth curtailed to a snail’s pace. An economic era of permanent austerity would result.
Few countries are likely to escape the economic fallout from intensifying climate impacts, according to report lead author Leonie Wenz. “Our analysis shows that climate change will cause massive economic damages within the next 25 years in almost all countries around the world, including highly-developed ones such as Germany, France and the United States,” she said. “These near-term damages are a result of our past emissions. We will need more adaptation efforts if we want to avoid at least some of them. And we have to cut down our emissions drastically and immediately – if not, economic losses will become even bigger in the second half of the century, amounting to up to 60 per cent on global average by 2100.”
Predictably, while almost all economies are expected to suffer, it is the poorest nations that face the gravest threats. “Our study highlights the considerable inequity of climate impacts: we find damages almost everywhere, but countries in the tropics will suffer the most because they are already warmer,” explained co-author Anders Levermann. “Further temperature increases will therefore be most harmful there. The countries least responsible for climate change, are predicted to suffer income loss that is 60 per cent greater than the higher-income countries and 40 per cent greater than higher-emission countries. They are also the ones with the least resources to adapt to its impacts.”
The overarching conclusion from the report is that, in the words of Wenz, “protecting our climate is much cheaper than not doing so, and that is without even considering non-economic impacts such as loss of life or biodiversity”. The report estimates the damages projected under the central scenario for 2050 “already outweigh the mitigation costs required to limit global warming to 2C by six-fold over this near-term time frame and thereafter diverge strongly dependent on emission choices”.
However, the study remains beyond sobering. It suggests that even if the global economy now moves rapidly to deliver on the goals of the Paris Agreement, economic development will still face a major hit in the coming decades as climate impacts escalate. Fail to deliver steep emissions reductions in the coming years, and global emissions are currently still rising, and there is a very real risk the sluggish growth that has infected many Western economies – bringing with it a wave of austerity, populism, and worsening geopolitical instability – will become the defining global economic trend.
The analysis also comes in a week when the way in which climate-related economic impacts could play out have been made painfully apparent. Dubai is starting to clean up after the worst floods in 75 years, after the city faced more rain in 24 hours than it usually received in a year and a half. A report from the Association of British Insurers confirmed the UK faced record levels of weather-related claims last year. And farmers in the UK and across much of Europe are warning they are set to endure one of the worst harvests in modern times due to extreme weather.
All these current impacts and future projections also fail to account for the risk of tipping points being reached that trigger the worse case scenarios that haunt climate scientists. Last week, a new study suggested Arctic permafrost is now a net source of greenhouse gas emissions. Fears remain that the Atlantic currents that shape the world’s weather systems look far from healthy.
Suggestions the global economy can ‘just adapt’ to climate impacts of the severity and scale we are already seeing look more recklessly cavalier than ever. Those who wish to accuse today’s report of scaremongering should reflect on how the economy would fare if harvest collapse and one-in-a-hundred-year floods become a routine occurrence. Under such scenarios, it would take a herculean effort to ensure only a fifth is knocked off future GDP.
The only source of succour here is that these plausible projections underscore how the investment required to accelerate the net zero transition and minimise such huge economic risks is dwarfed by the economic damages that will result from a continued failure to cut emissions. There is a good chance global emissions could peak this year or next, and the case for delivering a net zero economy that could be built with investment equivalent to just one per cent of GDP is more compelling than ever. Not least because the answer to the question, ‘how bad could it get?’, is ‘catastrophically bad’.
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