Losses could soar to $24tn and wreck the global economy in worst case scenario, first economic modelling estimate suggests
The economic impact of climate change could play havoc with the world economy, according to an LSE study. Photograph: Carlo Allegri/Reuters
Climate Change could cut the value of the world’s financial assets by $2.5tn (£1.7tn), according to the first estimate from economic modelling.
In the worst case scenarios, often used by regulators to check the financial health of companies and economies, the losses could soar to $24tn, or 17% of the world’s assets, and wreck the global economy.
The research also showed the financial sense in taking action to keep climate change under the 2C danger limit agreed by the world’s nations. In this scenario, the value of financial assets would fall by $315bn less, even when the costs of cutting emissions are included.
“Our work suggests to long-term investors that we would be better off in a low-carbon world,” said Prof Simon Dietz of the London School of Economics, the lead author of the study. “Pension funds should be getting on top of this issue, and many of them are.” He said, however, that awareness in the financial sector was low.
Mark Campanale of the thinktank Carbon Tracker Initiative said the actual financial losses from unchecked global warming could be higher than estimated by the financial model behind the new study. “It could be a lot worse. The loss of financial capital can be a lot higher and faster than the GDP losses [used to model the costs of climate change in the study]. Just look at value of coal giant Peabody Energy. It was worth billions just a few years ago and now it is worth nothing.”
The Bank of England and World Bank have warned of the risks to the global economy of climate change and the G20 has asked the international Financial Stability Board to investigate the issue. In January, the World Economic Forum said a catastrophe caused by climate change was the biggest potential threat to the global economy in 2016.
“Physical climate change impacts are a systemic risk on a massive scale,” said Ben Caldecott, the director of the sustainable finance programme at the University of Oxford. “Investors can do much more to differentiate between companies more or less exposed and they can help reduce the risk to the global economy by supporting ambitious action on climate change.”
The new study, published in the peer-reviewed journal Nature Climate Change, used economic modelling to estimate the impact of unchecked climate change. It found that in that scenario, the assets were effectively overvalued today by $2.5tn, but that there was a 1% chance that the overvaluation could be as high as $24tn.
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