We interrupt this program with a news flash from the International Institute of Finance:
Climate in the spotlight: The COVID-19 recession has been a stark reminder of how strongly the environment can impact the economy, as the long-term economic consequences of climate change increasingly begin to materialize.
However, assessing the impact of climate change on economic activity is fraught with uncertainty, and the literature yields a wide range of estimates. An overview of 27 of these estimates across different warming outcomes suggests that a 2.5°C rise in average surface temperature would decrease global income per capita by 1.3% on average. The dispersion of the 11 estimates measuring the effect of 2.5°C warming on income is large, ranging from -3% to +0.1%. This sample of 27 studies suggests that the income effect is negligible or even moderately positive for the first degree of warming but that it is increasingly negative for larger rises in temperature (Chart 1). One of these 27 studies provides a useful breakdown of welfare impacts of temperature deviations by country, highlighting large negative outcomes for sub-Saharan Africa, South and Southeast Asia, MENA, and much of Latin America and the Caribbean. In contrast, Northern, Western, and Eastern Europe, as well as Northeast Asia, the U.S., and Canada appear less exposed to big climate-induced income declines.
Business as usual would be bad business: A recent IMF cross-country study suggests that a persistent increase in the average global temperature of 0.04°C per year (implying roughly a cumulative rise of 3°C between 2020 and 2100) would reduce global GDP per capita by over 7% by 2100 (Chart 2). This measurement corresponds to the Representative Concentration Pathway (RCP) 8.5 scenario, which assumes higher levels of greenhouse gas emissions and an absence of mitigation policies. Of note, projected income losses vary substantially across countries, ranging from -0.5% in the Bahamas and the U.S. Virgin Islands to over 17% in Bhutan and Montenegro by 2100. While much of the older literature found that hot/poor countries suffer from larger climate change-induced income declines than cold/rich economies, this landmark new IMF report paints a more nuanced picture: e.g. Canada and India face large losses, while the European Union and Mexico might not be hit as hard. Moreover, the “tragedy of the horizon” is such that the impact is initially relatively minor (risking complacency) through 2030 and 2050–global GDP per capita losses of “business as usual” only amount to 0.8% and 2.5%, respectively. Yet under this same scenario, factoring in the effect of climate variability on GDP/capita suggests that the economic damage could be much greater, with global losses of 2%, 5%, and 13% by 2030, 2050, and 2100, respectively.
Fulfilling the promise of the Paris Agreement: Under the RCP 2.6 scenario, which corresponds to achieving the Paris Agreement’s objective of containing to temperature rise from pre-industrial times to 2100 to “well below” 2°C, global output loss would be only around 1%, as opposed to 7% under the busines as usual scenario. The difference between these scenarios is equal to the income losses that could be avoided through reaching Paris climate targets. With avoidable losses averaging 6% globally, Canada, Russia and the U.S. would be among the largest net beneficiaries of keeping a lid on emissions and global warming, while China and the EU would stand to gain somewhat less (Chart 3).
Complex transmission channels: The economic effects of climate change are wide-ranging, and measuring them presents a number of methodological challenges. The transmission channels and interactions are multiple (Charts 4 and 5): on the demand side, slowing economic growth can discourage businesses from investing and households from consuming, while changing climate patterns could disrupt the transport links that international trade depends on. On the supply side, natural resource depletion and climate-related damage to capital stock appear plausible, while worker productivity likely declines amid hotter temperatures. Mitigation and adaptation policies will also have a large impact on supply and demand, and on prices and wages (and, ultimately, financial stability): e.g., transitioning to a net zero emissions economy and imposing high carbon prices would raise fuel costs and affect the value of the capital stock in carbon intensive industries. “Within-country” income losses could also be highly uneven, with disadvantaged populations exposed to disproportionate declines through more exposure to climate hazards and less ability to cope with and recover from the shock.
Implications for sovereigns: In recent years, various research efforts have sought to quantify the impact of climate change on sovereign creditworthiness. Moody’s found that small, less diversified, and agriculture-reliant developing countries have the credit profiles most susceptible to climate change risk: Cameroon, Gabon, Mauritius, Philippines,
Rwanda, Swaziland, Tajikistan, and Tanzania. The first iteration of the Climate and Nature Sovereign Index found higher vulnerabilities in EMs — Qatar, Kuwait, and Saudi Arabia (Taiwan, Croatia, and Romania) were most (least) at risk — than in mature markets — Cyprus, the Netherlands,and Portugal (Sweden, Finland, and Austria) were most (least) at risk. A recent study by HSBC suggests that Finland, Sweden, and Germany (Nigeria, Bangladesh, Kuwait) are the most (least) resilient countries to climate risks, when measuring carbon embeddedness, adaptation to physical risks, governance, and green opportunities. In a sample of 40 EMs and mature markets, a recent analysis by SOAS estimate that premia on sovereign bond yields amount to some 275bps for highly climate-exposed EMs versus 113bps for other EMs, and that shocks to climate vulnerability and resilience have permanent effects on bond yields.
Now, back to Joel Fitzgibbon…