Zurich's Guy Miller on climate change

global warming

  • If nothing is done to tackle climate change, extreme weather events could become more frequent and cause more physical risks
  • If something is done to tackle it, the energy sector - and potentially the financial markets - will be disrupted

Guy Miller, head of macroeconomics at Zurich, looks at the risks associated with extreme weather and anti-climate change initiatives.

The recent devastating effects of the Atlantic hurricanes and flooding in Southern Asia underscore the profound consequences of extreme weather, and the need to comprehensively tackle rising temperatures if the frequency of incidents is to be curbed.

The question is: will it be the risks associated with climate initiatives themselves, or will it be the consequences of a changing climate that are most prevalent? Either way, the risks that businesses and society in general face are going to rise whether climate change is adequately addressed or not. It seems that we are damned if we do, damned if we don’t!

Given the deluge of opinion, scientific evidence and political rhetoric that abounds, one way to help understand which types of risks and opportunities are becoming more likely is to define two stylistic scenarios, and then track data to determine which is becoming the most likely.

For example, one scenario could be where there is little appetite to adequately address rising temperatures, which results in a rising incidence of extreme weather events and the ‘physical risks’ of loss of life, property damage and crop failure. The other could assume that the intent of the COP 21 Paris agreement is followed through on. Limiting the rise in temperature to below 2 degrees of the pre-industrialisation level by 2100 would, of course, require a switch away from fossil fuels and have a material impact on the energy sector.

Both scenarios will be disruptive, but how we position and react to each will differ considerably.

Analysis shows that physical risks are likely to increase slowly over time, although most scientific studies point to an inflection point approaching, whereby the rate of change increases substantially. Thus there is likely to be more time for adaptation, though outcomes will be dire.

Transition risks represent a more immediate challenge. However, to meet the aims of COP 21 will require a seismic change in legislation, the appropriate pricing of carbon, and, realistically, a breakthrough in terms of technological innovation such as carbon capture or electricity storage. This scenario is likely to result in certain assets becoming ‘stranded’ – meaning becoming obsolete, too expensive to utilise, or prohibited, causing significant disruption to business and potentially financial markets within a relatively short timeframe.

Partly because of the different timing of impact and disruption of each scenario, it is perhaps understandable why there is a tendency by policymakers to delay initiatives. However, the longer it takes to rein in temperature change, the more disruptive actions will have to be in the future if the COP 21 is to be achieved. Unfortunately, this is the direction that our own scorecard currently points to, due to slow progress on two critical factors of legislative change and a pervasive approach to carbon pricing. Currently only around 13% of carbon emissions are priced and at a level of around only $10 (£7.60), compared with the $100 that the World Band quotes to be broadly commensurate with a trajectory towards a 2-degree world.

Of course, there could be technological breakthroughs that dramatically alter that trajectory, with the capture of carbon emissions perhaps offering the most potential. The good news is that, although the risks of transitioning to a 2-degree world are front-end loaded, the opportunities offered are much greater than failing to act. Estimates by the International Energy Agency suggest that in excess of $50trn (£38trn) of investment in the energy space alone will be required over the next 15 years, which should encourage innovative solutions and potentially game-changing discoveries.

Currently, however, the global environment is one of business as usual rather than meaningful repositioning to reverse rising temperature. Consequently, physical risks will progressively increase, while transition risks are likely to remain fairly low.

It is not too late to change direction, but the longer it takes, the more drastic and disruptive the solutions will have to be in absence of a revolutionary technological breakthrough.

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