IIF: Climate change to consume 7% of income by 2100

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…

David Llewellyn-Smith
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  1. In reading this report, it would be a mistake to think that the disadvantaged populations would simply stay there and take the outcome. The human wave that reached Europe in 2016 that started in Syria and went through Turkey (and the regular people smuggling across the Mediterranean) looks to me like a forerunner of population movements to be anticipated if a region becomes unlivable, and people get sufficiently desperate. And if there are regions that benefit then that is would be where people would want to go, and the usual forms of conflict start from there.

    • chuckmuscleMEMBER

      Agree. In addition, Chart 1 makes the list for worst chart of the year. Do they seriously think a +6 degree change will only cost us 7% in per capita income? JFHC… These clowns and their Excel models running a best fit polynomial. Oxygen thieves doing NO service to urgency required for action. Now, back to house prices please

    • David WilsonMEMBER

      Isn’t it interesting that the alarmists ignor the scientific fact that each year since 2016 has been cooler than that year.
      Science also ignore that natural climate change if it gets hotter will cause more cloud formation over seas and oceans and thus more rainfall over land formations and thus more plant,crop and tree growth aided by higher CO2 levels will help a balance out and tend to reverse any warming trends.
      We as humans have a substantial influence on climate as more roads and buildings and industry along with huge solar panel fields also contribute in a substantial way to heating our atmosphere so we should embrace nuclear energy and clean coal, gas etc and have a hard look at what we can do by improving the built environment to reduce the heat island affect of cities .
      If temperatures have gone up by 1 degree in the last one hundred years this has not adversely impacted on our lives or crops and we do need to realise that natural climate cycles have seen sea levels 6 metres higher than today and 120 metres lower and there ain’t a thing we can do about it so my advice is not to get too excited about solar, but we should embrace change and deal with it as it happens and work towards cleaner seas and the air we breath.

      • Nice punctuation I always thought myself that all those pesky commas full-stops and concise sentences were simply inhibiting my ability to comprehend the mysteries of the universe and especially the significant and challenging problems of our time but I guess its just my own linguistic shortcomings yet maybe Im not the only one

      • TheLambKingMEMBER

        Isn’t it interesting that the alarmists ignore the scientific fact that each year since 2016 has been cooler than that year.

        But EVERY year since 2016 has been HOTTER THAN EVERY YEAR BEFORE THAT in the industrialised era. But you already knew that and were just trying to spread doubt and undermine action on reducing our use of fossil fuels. Your kids will be proud when they find your work on the Internt.

    • @ Curious
      Yep. Europe can expect most of Central Asia, India and northern China to migrate north. A bloodbath.

  2. I am always amazed at the accuracy of the figures they are pulling out of asses and they always fail to take into consideration any benefits of CC : CO2 fertilization (earth is greening fast)/ access to extremely valuable frozen lands/precipitation increases

  3. 7% is a gross underestimation. Cities will be awash with sea water, aquifers ruined, crops unable to survive the 10-15°C above normal heatwaves…. humans have no accurate conception of what’s coming.

  4. I love life, CO2 is life (that must be my biology background lol), the more the better.

    But even at it s most likely useless for its purpose (like every SJW endeavors) I fully support “renewables” are they will provide good local/non offshorable jobs.

  5. Don’t ya just love the assumptions in this ‘research’ by white-anting Financial Institute F*ckwts?:-

    That by 2100 we will still have a global economy; that FF prices ‘might rise with higher carbon prices’; that ‘disadvantaged populations’ ‘may’ have less ability to ‘cope and recover from the shock’; that ‘economic growth can discourage businesses from investing and households from consuming’;

    And my fav: ‘that shocks may have permanent effects on BOND YIELDS’ Hahahahaha

    For starters the Paris Agreement is a dead duck. If attempted we’d fry the planet with the amount of FFs required:

    And be lucky to have any oil left:

    Perhaps the authors have also forgotten/don’t know that it takes millennia for the planet to recover from a 3 degree warming, species extinctions, topsoil loss (forecast to be non-existent by 2060), deforestation, glacier melt, desertification, rising seas, including the loss of many/most coastal cities, fisheries…..

    All this will mean we’re minus 7% of income???? Try 99%! By 2100 we’ll be lucky to have any species left. Including us.

    Wonder what they were paid to write this piece of utter garbage?