Harvard Business Review alerts us to a study in Nature that uses an integrated assessment model to estimate the value at risk due to climate change.
“An important new study, published in the journal Nature Climate Change, says that climate change will be expensive. Extremely expensive. It turns out that if you mess with the planet’s thermostat, it’s not great for the economy or investments. Forget the polar bears; your pension and retirement funds are in trouble.”
The study is paywalled and I’m not convinced that there is real value in looking at someone’s use of a model to tell us we’ll all go broke. But the abstract from the paper says “We find that the expected ‘climate value at risk’ (climate VaR) of global financial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global financial assets, this amounts to US$2.5 trillion. However, much of the risk is in the tail. For example, the 99th percentile climate VaR is 16.9%, or US$24.2 trillion.”
Of course, the tail is the part of climate change that keeps getting lopped off as scientists come in with lower sensitivity estimates. And that estimate is over the course of a century, during which global GDP is expected to grow to between US$ 309 trillion and US$ 906 trillion in 2100. Even a loss of 24.2 trillion dollars over the next 85 years doesn’t look catastrophic with such growth as a backdrop.
HBR continues: “When investors look at climate risk – if they do at all – they’ve focused mainly on what worldwide action to reduce carbon will do to the fossil fuel industry. Holding global warming to 2-degrees Celsius will require keeping huge quantities of fossil fuels in the ground. These so-called “stranded assets,” sitting on petro-company balance sheets, are essentially worthless. And thus those companies are massively overvalued.
The stranded assets argument sounds (financially) scary, but it hasn’t been quite enough to truly shift capital flows toward the clean economy. Dietz’s new research, by saying that climate change is a threat to all assets, could get a much broader coalition of investors moving.”
As for stranded assets, fossil fuel consumption is projected to double by 2050. Assets are more likely to be depleted than stranded, given the expected growth in energy consumption in the developing world, the expected growth in air travel, the expected growth in automobiles on the road, etc.
The only factor that can strand fossil fuel assets is political. The demand for fossil fuels is there.The market is ready to supply it.
The problem is that stranding fossil fuel assets will have more of an impact on global GDP and asset values than climate change.
“This new infographic by QuidCorner shows that the global cost of switching to renewable energy is high at £29.46 trillion – but that’s still only 21% of global wealth.”
There may be cogent and compelling reasons to abandon fossil fuels and turn instead to renewables. I’m willing to be convinced, although I haven’t been yet. (I favor a phased transition starting with natural gas and depending in future upon a much higher use of nuclear energy, assisted where possible by renewables.)
But that cogent and compelling case will not be financial in nature.