Explanation: Climate change: what are the economic challenges?

October 25 – The COP26 climate talks in Glasgow starting next Sunday could be the world’s best last chance to limit global warming to the upper limit of 1.5 to 2 degrees Celsius set in the Paris Agreement from 2015.

The stakes for the planet are enormous, one of which is the impact on economic livelihoods around the world and the future stability of the global financial system.

Here are 10 questions related to climate change that economic decision-makers are trying to answer:

1) HOW MUCH IS CLIMATE CHANGE? From Floods and Fires to Conflicts and Migration: Business models struggle against the many possible spillover effects of global warming. The IMF’s rough estimate is that uncontrolled warming would reduce world output by 7% by 2100. The Network for Greening the Financial System (NFGS) group of world central banks places it even higher – 13%. In a Reuters poll of economists, the median production loss figure in this scenario was 18%. Read more

2) WHERE WILL THE IMPACT FEEL THE HARDEST? – Clearly, the developing world. Much of the world’s poor live in tropical or low-lying areas that are already suffering from the impacts of climate change, such as droughts or rising sea levels. In addition, their countries rarely have the means to mitigate. such damage. The NFGS report predicts overall production losses of over 15% for much of Asia and Africa, reaching 20% ​​in Sahelian countries.

3) WHAT DOES THIS MEAN FOR INDIVIDUAL LIVELIHOODS? Climate change will push up to 132 million more people into extreme poverty by 2030, a World Bank document concluded last year. Factors included loss of farm income; decline in labor productivity abroad; rising food prices; increased disease; and economic losses due to extreme weather conditions.

4) HOW MUCH WILL IT COST TO REPAIR IT? Advocates of early action say the sooner you start, the better. The widely used NiGEM macroeconomic forecasting model even suggests that an early start would offer small net gains to production from the large investments required in green infrastructure. The same model warns of production losses of up to 3% in last-minute transition scenarios.

5) WHO LOSES IN A “NET ZERO” CARBON WORLD? Primarily, anyone exposed to fossil fuels. A report by the Carbon Tracker think tank in September estimated that more than $ 1 trillion in usual oil and gas investments would no longer be viable in a truly low-carbon world. In addition, the IMF has called for an end to all fossil fuel subsidies – which it calculates at $ 5,000 billion per year if set to include the underbilling of supply, environmental and health costs.

6) WHAT SHOULD CARBON REALLY RAISE? Tax or permit regimes that attempt to account for the damage caused by emissions create incentives to go green. But so far, only a fifth of global carbon emissions are covered by such programs, with the carbon price averaging just $ 3 per tonne. That’s well below the $ 75 / tonne that the IMF says is needed to limit global warming to well below 2 ° C. The Reuters poll of economists recommended $ 100 / tonne. Read more

7) WOULD NOT LEAD TO INFLATION? – Anything that takes into account the polluting cost of fossil fuels is likely to lead to price increases in certain sectors, aviation for example. This in turn could lead to what central banks define as inflation – widespread and lasting price increases throughout the economy. Yet history shows that this has not necessarily been the case: carbon taxes introduced in Canada and Europe have lowered overall prices because they have reduced household income and therefore consumer demand. , showed a recent study. It’s also true that doing nothing could lead to inflation: a European Central Bank document last year warned of rising food and commodity prices due to extreme weather events and shortages. of land caused by desertification and sea level rise.

8) DO GREEN ADVANCES REALLY DECOUPLE EMISSIONS FROM ECONOMIC GROWTH? Truly sustainable growth means that economic activity can grow as needed without adding even more emissions. This is the holy grail of “absolute decoupling”. But so far, any decoupling has either been largely relative – in the sense simply of achieving economic growth rates higher than emissions gains – or achieved by moving dirty production from national territory to national territory. another. And that is why, for now, global emissions continue to rise.

9) WHO IS BLOWING THE TRANSITION? The idea of ​​”Just Transition” has been adopted by bodies such as the European Union to recognize that the transition to net zero must be done in a fair way – for example by ensuring that low income groups are not not deteriorated. Globally, the rich countries that since their industrial revolutions have generated the bulk of emissions have pledged to help developing countries make the transition through $ 100 billion in annual transfers – a promise broken until here.

10) CAN THIS TRIGGER A FINANCIAL CRISIS? The global financial system must be protected both from the physical risks of climate change itself and from the upheavals that can occur in a transition to net zero. Central banks and national treasuries are calling on banks and other financial players to shed light on the exposure of their accounts to such risks. The ECB and other regulators have made it clear that there is a long way to go in this area.

Editing by Giles Elgood

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