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Acting to Combat Climate Change: A Cost Benefit Analysis

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We are getting a much clearer picture of the costs associated with climate change and the benefits of action to combat it.  While adding up the costs of a warmer world is no easy feat, economists are increasingly quantifying the risks associated with climate change. The price tag associated with global warming includes the costs associated with extreme weather, declining global food stocks, degraded ecosystems, the loss of biodiversity, flooding, sea level rise, droughts, fires, the collapse of the permafrost sink, loss of productivity, business disruptions, violent conflicts, and climate refugees.

A climate change cost benefit analysis clearly show the unacceptable cost of inaction and the overwhelming benefit of action on climate changeWorse than we know

The costs of climate change may be far greater than predicted by the standard economic models such as those used by the U.N. International Panel on Climate Change (IPCC). In June of this year, Lord Stern and his colleague, Dr Simon Dietz, published research in The Economic Journal,which warns that the financial damage caused by global warming will be considerably greater than current models predict.

“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the IPCC report, which have made assumptions that simply do not reflect current knowledge about climate change and its … impacts on the economy,” said Lord Stern.

Extreme weather

As revealed in a 2012 study by insurance giant Munich released just days before Sandy struck, North America had already incurred $1.06 trillion in extreme weather damage since 1980. To put this number in context, that is five times the average loss in prior decades.

As explained in a Ceres report. titled Inaction on climate change: the cost to taxpayers, in 2013, Federal and state disaster relief payouts are estimated to have cost every person in the U.S. more than $300. There have been at least 200 weather-related natural catastrophes annually in North America in recent years, compared to an average of around 50 a year in the early 1980s.

Flooding

As reviewed in a Global Warming is Real article, flooding is one of the leading expenses associated with climate change. It is already very expensive and the situation is expected to get far worse. In 2007, the UNFCCC estimated that the annual cost of flooding excluding storm intensity was about $11 billion. New reports indicate that the actual costs are likely to be much higher.

A new Bloomberg report titled Risky Business: The Economic Risks of Climate Change in the United States,  indicates that as much as $106 billion worth of existing coastal property in the US will fall below sea level by 2050. The oceans could engulf as much as $507 billion worth of property by 2100.

World Bank report indicates that the cost of flooding in 2005 was $6 billion and that figure could increase to at least 1 trillion annually by 2050.  According to a PNAS study, storm surges alone could increase costs from the current level of about $10-40 billion per year to up to $100,000 billion per year by the end of century.

Benefits

The benefits of combating climate change could amount to trillions of dollars each year. The International Energy Agency (IEA) says that transitioning to clean energy alone could save us as much as $115 trillion in fuel costs by 2050.

According to a new World Bank report, policies aimed at cutting carbon would proffer tremendous economic benefits in terms of new jobs, increased crop productivity and public health benefits. The study titled, Climate-Smart Development, uses climate modeling.

The report states that responsible climate policies (transportation, energy and efficiency) in the EU, Brazil, China, India, Mexico, and the U.S. could provide annual GDP growth of between $1.8 trillion and $2.6 trillion by 2030.

This would take us almost one third (30 percent) of the way towards keeping global average temperatures within the internationally agreed upon upper threshold limit of 2°C (3.6°F). Such policies would reduce carbon emissions by 8.5 billion metric tons and save nearly 16 billion kilowatt-hours of energy which is the equivalent to taking 2 billion cars off the road.

According to the IEA report, renewable energy, energy efficiency and energy storage can stave off climate change and provide significant economic benefits. The report titled Energy Technology Perspectives indicates that these measures could generate net savings of $71 trillion” by 2050. They would also keep global average temperatures within the internationally agreed upon upper threshold limit of 2°C (3.6°F).

Scientists led by Professor Martin Parry (a former co-chair of the IPCC) in a 2013 report published by the International Institute for Environment and Development (IIED) calculated that the benefit of combating climate change amounts to between $615 to $830 trillion.

This is the finding in the IIED report titled, Assessing the costs of adaptation to climate change: a review of the UNFCCC and other recent estimates. It concludes that the costs will be even greater if we factor the full range of climate impacts.

Costs

Over time the costs reported in studies that quantify climate change keep increasing. According to a 2008 study released by the UN-backed Principles for Responsible Investment (PRI) and UNEP Finance Initiative, global environmental damage caused by human activity in 2008 represented a monetary value of $ 6.6 trillion, which is equivalent to 11 percent of global GDP. The UNEP Finance Initiative report titled Putting a Price on Global Environmental Damage estimates that global costs could rise to $28 trillion by 2050.

According to another estimate, the mean annual impacts of climate change in 2060 range from about $1.5 trillion to as large as $20 trillion.

According to the IIED study, the cost of climate change could go as high as $1240 trillion with no adaptation. With appropriate adaptation efforts the costs are reduced to about $890 trillion.

Growth

According to the IPCC, keeping temperatures within the internationally agreed upon upper threshold limit of 2°C (3.6°F) would have a negligible impact on growth compared to the powerfully destructive impacts of unchecked climate change.

The third of four IPCC reports released in April indicated that addressing climate change would have a net effect on growth of 0.06 percent per year. According to the IPCC’s Fourth Assessment (AR4) in 2007, the cost of stabilizing carbon pollution at 445 ppm CO2-eq corresponded to “slowing average annual global GDP growth by less than 0.12 percentage points.” This translates to a cost of about one tenth of a penny for each dollar. However, these assessments of the effects on economic growth do not factor the economic benefits of avoiding a climate catastrophe.

The World Bank report suggests that pro-climate policies could add 1.5 percent to GDP growth.

Climate change cost benefit analysis

A cost benefit analysis convincingly makes the case for action. A global transition to clean energy would cost $44 trillion but save $115 trillion in avoided fuel costs, the IEA reports.

Extrapolating from the IIED report, a Think Progress article indicates that keeping atmospheric carbon below 450 ppm will cost about $410 trillion ($275 trillion with adaptation).  So stabilizing at 450 ppm reduces net present value (NPV) impacts by $615 to $830 trillion. The abatement NPV cost is only $110 trillion which represents a 6-to-1 savings.

Economists are increasingly able to quantify the risks of failing to engage climate change and the benefits of acting now. As reviewed in a New York Times article, even Henry Paulson, secretary of treasury under George Bush, uses a cost benefit analysis to call for immediate action on climate change.

According to one estimate, in the last two years alone, delays in engaging climate change have cost us $8 trillion.  A number of economists have made the point abundantly clear, delaying action on climate change is far more costly in the long run. One thing is certain, the longer we wait, the more it will cost.

A plethora of new data puts to rest the claims that the world cannot afford to act on climate change. It would be more accurate to say we cannot afford inaction.

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Richard Matthews is a consultant, eco-entrepreneur, green investor and author of numerous articles on sustainable positioning, eco-economics and enviro-politics. He is the owner of The Green Market Oracle, a leading sustainable business site and one of the Web’s most comprehensive resources on the business of the environment. Find The Green Market on Facebook and follow The Green Market’s twitter feed.

Image credit: Oxfam International, courtesy flickr

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