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Unpacking climate change’s $2.5 trillion impact

Unpacking climate change’s $2.5 trillion impact

By on 5 Apr 2016commentsShare

Climate change is all about the Benjamins. Sign as many international climate agreements as you want, you’ve still got to scrounge up about $16.5 trillion for all those solar panels and seawalls.

But that’s just the first row on the climate change balance sheet. Not only does the world have to front a huge amount of money to solve the climate crisis, it’s putting trillions more at risk if it doesn’t — trillions that should be sitting in your pension or retirement fund.

A new study, published on Monday in Nature Climate Change, offers a new way to think about the financial risks of doing nothing.

The study’s authors, based at the London School of Economics and the research firm Vivid Economics, estimate that a business-as-usual emissions path would lead to expected warming of 2.5 degrees C by 2100. Under that scenario, banks, pension funds, and investors could sacrifice up to $2.5 trillion in value of stocks, bonds, and other financial assets. The worst-case scenario, with a 1-percent chance of occurring, would put $24 trillion (about 17 percent of global financial assets) at risk.

This is the first time economists have put climate risk in terms the financial sector understands — and the picture isn’t particularly pretty. Let’s dive in.

Why is climate change so expensive?

Transitioning to a green economy will undoubtedly require a bunch of cash. The nonprofit advocacy group Ceres estimates that we’ll need about $1 trillion annually in investment to shift the world away from fossil fuels. But let’s put that aside for a moment, and talk about what happens if we don’t put up the money. What do we stand to lose?

Climate change can affect the economy in myriad ways; including the extent to which people can perform their jobs, how productive they are at work, and the effects of shifting temperatures and precipitation patterns on things like agricultural yields or manufacturing processes. These factors help determine our “economic output” — all the goods and services produced by an economy. Output is usually measured by tools like the Gross Domestic Product.

Back in October, a study published in Nature estimated that the world could see a 23 percent drop in global economic output by 2100 due to a changing climate, compared to a world with no climate change.

“Historically, people have considered a 20 percent decline in global Gross Domestic Product to be a black swan: a low-probability catastrophe,” said a coauthor of that study, economist Solomon Hsiang of U.C. Berkeley. Instead, he says, “We’re finding it’s more like the middle-of-the-road forecast.”

What other costs haven’t we been counting?

But economic output isn’t the same thing as asset value. There’s a difference between economics and finance, and the Nature Climate Change study targets the latter.

Let’s say a company makes chocolate bars. Climate change might mess with cocoa production or productivity of workers. Maybe some of the bars end up a lil’ melty and misshapen and nobody wants to buy them. All told, the company might see a drop in sales.

If the company’s output drops, that’s one thing. But you also have to think about these losses in terms of what the company’s board of directors has to tell its shareholders and lenders. These investors — the ones who made those chocolate bars possible in the first place, whether through buying stock or granting loans — are expecting returns on their investments (through dividends and interest). Lower output likely means lower returns for them.

Until Monday’s Nature Climate Change study, nobody had really quantified the climate-induced losses at this level. Economic output studies like Hsiang and his collaborators’ are about the actual gears of the economy: the stuff that’s being produced, the way it’s being produced, and the people that are producing it. The LSE and Vivid Economics study is about the money greasing the wheels and the people holding this money. Those are the people who really matter when it comes to a clean energy transition, because they’re the ones with the bank accounts to finance it.

What’s more, corporate boards are legally obligated to make sure those shareholders’ bank accounts look good. This idea — “fiduciary duty” — means that corporate boards and institutional investors like pension fund managers can (must!) take action to further the interests of investors.

Demonstrating the risk climate change poses to financial assets is a way to appeal directly to these responsibilities. For those of us interested in climate action, that’s a good thing.

So how does climate change put these assets at risk?

The authors of the new study write that climate change can affect the value of financial assets in two ways. First, it can just destroy them. If a hurricane wrecks a beachfront hotel, that hotel no longer produces financial value.

Second, climate change can reduce how much a given investment is worth. This point is a little more abstract. One of the things that Hsiang and his colleagues showed in October was that there’s actually an optimal temperature for economic productivity: about 55 degrees F. Any shift in average temperature above that threshold tends to result in less productivity from workers. If workers are less productive but investment levels remain the same, that means those dollars aren’t worth as much in a warming world.

The craziest thing about this argument is that it’s not just about the fossil-fuel industry — it’s about the whole financial sector. Plenty has been written about the potential losses that investors could incur due to continued faith in the fossil-fuel economy. The “stranded asset” argument says that as climate policy makes fossil fuels less and less likely to be burned, investors sitting on fossil reserves won’t be able to make a profit or sell them off.

By broadening this argument to include risks for effectively every investor under the sun, the authors have just turned up the heat on us all.



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Unpacking climate change’s $2.5 trillion impact

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The NFL Has a Domestic-Violence Problem, But All We Got Was This PSA

Mother Jones

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Ever since the NFL embarrassingly mishandled the Ray Rice domestic-assault incident this summer, the league has tried to prove it has become enlightened about violence against women. Its latest attempt? A 30-second Super Bowl ad.

The new public service announcement, which will air during the first quarter of Sunday’s game, pans through a house in disarray, presumably because of a domestic dispute, while audio of a woman talking to a 911 dispatcher plays over it. At the end, a message flashes on: “Help End Domestic Violence and Sexual Assault; Pledge to Say ‘No More.'” The PSA was made, free of charge, by advertising giant Grey for the sexual- and domestic-violence-awareness group NO MORE; the league donated the prime advertising spot, worth about $4.5 million.

These broadcasts are part of an NFL offensive to save face after the Baltimore Ravens and the league created an uproar by barely punishing Rice after he was first charged with assaulting his then-fiancée (and current wife). It wasn’t until TMZ leaked security footage showing Ray Rice punching Janay Rice in an Atlantic City elevator (which Goodell dubiously claimed he hadn’t seen before) that the NFL indefinitely suspended the Ravens running back and began to make an effort to change how it handles players accused of domestic violence and sexual assault.

The NFL has since reformed its punishments for players involved in domestic or sexual violence, created rather confusing new disciplinary bodies to determine and hand out those punishments, required the league to attend education sessions about sexual assault and domestic violence, and hired female advisers to improve how the league deals with domestic violence.

The NFL had its first test leading up to the AFC Championship game, when it put the Indianapolis Colts’ Josh McNary on paid leave after he was charged with rape. But in order for the NFL to prove that it’s committed to lasting reform of an entrenched culture that has long ignored and even enabled violence against women, it will to need to continue to address these issues—long after its Super Bowl ad has aired and the dust of this horrible season has settled.

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The NFL Has a Domestic-Violence Problem, But All We Got Was This PSA

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U.S. whacks India with WTO complaint over its local solar program

U.S. whacks India with WTO complaint over its local solar program

Kiran Jonnalagadda

India is going gangbusters for solar. Over the past four years, the country has boosted its grid-connected solar capacity from 18 megawatts to 2,200 MW. The prime minister’s pet renewables project, the Jawaharlal Nehru National Solar Mission, aims to increase that figure to 20,000 MW by 2022. And, as we told you yesterday, India has plans to build the world’s biggest solar array.

Such ambitions are helping the country slow the growth of its carbon emissions and are providing reliable electricity supplies to historically electricity-poor communities. And because the national solar program requires developers to use domestically made panels, it’s generating green jobs in a country where poverty is rampant.

Which all sounds great — unless you’re the U.S. government.

U.S. Trade Representative Michael Froman says India’s rules requiring use of domestically produced solar panels unfairly discriminate against American panel manufacturers. He has been trying to smash open trade barriers around the world on environmental goods like solar panels and wind turbine components. On Monday, he announced that the U.S. would file a case with the World Trade Organization in a bid to abolish India’s rules on use of domestic panels. “Domestic content requirements detract from successful cooperation on clean energy and actually impede India’s deployment of solar energy by raising its cost,” Froman argued.

The complaint could eventually lead to a WTO ruling on whether the requirements are legal under international law. If they are ruled to be illegal and India refuses to yield, the stage could be set for a trade war between the world’s biggest democracies.

(And the U.S. and India haven’t exactly been BFFs lately. After an Indian diplomat was arrested in December for alleged labor violations involving her maid, India retaliated by stripping American diplomats of certain privileges and removing security barriers from in front of the U.S. embassy. One Indian official went so far as to suggest arresting gay partners of American diplomats in India, where homosexuality is banned.)

India’s trade minister vowed to protect the domestic solar requirements, and hinted that the nation was ready to escalate the fight. “India will respond at the WTO adequately,” Anand Sharma told reporters in Delhi. “We may also have some issues with them with regard to solar. We may also have an application or may move the WTO.”

U.S. launches new trade action against India over solar program, Reuters
India says to respond to US trade action at WTO, Reuters

John Upton is a science fan and green news boffin who tweets, posts articles to Facebook, and blogs about ecology. He welcomes reader questions, tips, and incoherent rants: johnupton@gmail.com.

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U.S. whacks India with WTO complaint over its local solar program

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