May 30, 2024
World Economy

With Climate Damages At $38trn Annually, The Economy Needs Action Now

On Earth Day, many try to raise awareness of the need to protect the earth and its natural resources. What matters now however is understanding the damage of our failure to do so. With the latest research showing $38 trillion in annual damages from the way we do business today, it’s time to act.

The world is committed to income reduction of 19% due to climate change

Even if CO2 emissions were to be drastically cut down starting today, the world economy is already committed to an income reduction of 19 % until 2050 due to climate change, according to a new study published in Nature. These damages are six times larger than the mitigation costs needed to limit global warming to two degrees.

The research saw scientists at the Potsdam Institute for Climate Impact Research (PIK) assess future impacts of changing climatic conditions on economic growth and their persistence. Overall, global annual damages are estimated to be at $38 trillion dollars, with a likely range of $19-59 trillion in 2050. These damages mainly result from rising temperatures but also from changes in rainfall and temperature variability. Accounting for other weather extremes such as storms or wildfires could increase these figures even further.

That doesn’t mean that everyone will lose 19% in their income, that’s a figure for the world overall. There will be winners and losers, as there are in most things. One thing no one can deny however is how damaging this will be. “Our analysis shows that climate change will cause massive economic damages within the next 25 years in almost all countries around the world, also in highly-developed ones such as Germany, France and the United States,” said PIK scientist Leonie Wenz who led the study.

Income reduction will impact every region

PIK scientist and first author of the study Maximilian Kotz said: ““Strong income reductions are projected for the majority of regions, including North America and Europe, with South Asia and Africa being most strongly affected. These are caused by the impact of climate change on various aspects that are relevant for economic growth such as agricultural yields, labor productivity or infrastructure.”

Unsurprisingly, those countries least responsible for emissions are those most likely to suffer from its impacts. Anders Levermann, head of research at the Department Complexity Science at the Potsdam Institute and co-author of the study said: “The countries least responsible for climate change, are predicted to suffer income loss that is 60% greater than the higher-income countries and 40% greater than higher-emission countries.”

This is not however simply a question of negative impacts that are happening to someone else, far away – it’s having an impact everywhere. The research is building on a body of work that has for some time been warning of the economic impact of climate change. Extreme weather events from storms, to floods, intense heat and wildfires are all on the increase. More frequent and intense heat waves are causing public health issues, economic loss, human suffering, and increasing mortality rates.

In fact, a 2022 research paper said that an estimated $16 trillion was lost between 1992 and 2013, due to the effect of high temperatures on human health, productivity, and agricultural output – an amount in the lower ranges as the costs could have hit as much as $50 trillion a year.,

In the US alone, according to Extreme Heat: The Economic and Social Consequences for the United States, the economic costs of extreme heat are estimated to reach $100 billion every year, just in “heat-induced declines in productivity.” The report says: “Nearly all US counties are feeling the economic burn of extreme heat, with labor-productivity losses expected to cost half a trillion dollars annually by 2050.” The report also predicts that extreme heat will claim nearly 60,000 lives a year by 2050.”

Today’s climate impact is baked in, we need to change the path forward

Wenz explains that these near-term damages are a result of past emissions and that increased adaptation will be needed to avoid some of their impact. But also, she says: “We have to cut down our emissions drastically and immediately – if not, economic losses will become even bigger in the second half of the century, amounting to up to 60% on global average by 2100. This clearly shows that protecting our climate is much cheaper than not doing so, and that is without even considering non-economic impacts such as loss of life or biodiversity.”

One of the most challenging aspects of this type of analysis is that it tends to be published, read and then the world moves on. Despite the clear link between current economic behaviour and the negative economic impacts, there is still little appetite to value those impacts and connect the costs to corporate behaviour. At some point, the recognition that the economy can only function effectively within a healthy environment must be achieved.

It goes beyond the fact that the economy cannot exist outside nature and the environment in which we all exist. PwC analysis has pointed out that over half of global GDP, or $58 trillion, is moderately or highly dependent on nature. Despite this, research from the World Benchmarking Alliance shows that few companies know how much their operations depend on nature, let alone disclose their impact.

The challenge here is that if we ignore the need for action on emissions and nature and ecosystem protection, we are effectively cutting off the economy at its knees. The problem is that our current political and financial systems are focused on maximising short term or above returns – without factoring in that in the end it’s the tax-payer who ends up paying for social and environmental problems.

As Levermann says: “It is on us to decide: structural change…is needed for our security and will save us money. Staying on the path we are currently on, will lead to catastrophic $100 Billion annually. From 1992 to 2013, an estimated $16 trillion was lost to the effects of high temperatures on human health, productivity, and agricultural output.

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