Economic Views

Climate change matters: a roundup of events in October

Temperature records continue to be broken

NASA’s latest data show that the last 12 months have been the hottest on record since 1880, reflecting the ongoing global warming that has been boosted by the El Niño event currently underway. It is likely that the combined effects of global warming and El Niño are contributing to the dry weather and forest fires in Indonesia, an incipient drought in Australia and a developing food emergency across Africa.


Oceans impacted by warming

There are growing concerns that the level of warming and acidification (which occurs as carbon dioxide is absorbed by the oceans) observed in the world’s oceans will have negative impacts on its ecological function. Scientists have confirmed that 2015’s level of oceanic warming is causing the third-ever global bleaching of coral reefs. Coral bleaching occurs when reefs turn white under stress (but do not die), having expelled the algae living on them. Research suggests that by the end of the year, 38% of the world’s reefs will have been affected and about 5% will have died. However, it is not just changes in the tropics that are being observed; in the Arctic, September ice thickness was down 85% compared to 1975, and since the 1980s, Arctic sea ice that is older than 5 years has decreased from over 30% of the total ice pack to only 8% today.

Climate tipping points could occur before dangerous levels of warming are reached

Perhaps of most concern is a recent report[1] that highlighted that “tipping points” in regional climate systems are likely to occur even before the world reaches 2oC above pre-industrial temperatures (anything more has been deemed as dangerous by global experts). Such tipping points could be the Arctic becoming ice-free in the winter (thinning summer sea ice is a precursor for this) or mass dieback of the Amazon rainforest for example.

Military leaders highlight growing security risks due to global warming

The risks related to climate change are something that the military sees as a growing threat to known sources of conflict. According to NATO Parliamentary Assembly Special Rapporteur, Philippe Vitel, “Climate change is increasing the risk of violent conflict by exacerbating known sources of conflict, like poverty and economic shocks. The time to act is now[2]”. Similar concerns were expressed in an advert in the Wall Street Journal, in which 48 former leaders of America’s defence and foreign policy establishment urged greater action to address climate change by US leaders. Meanwhile, in Australia, a former defence chief has said that the Australian Defence Force will not be able to cope with concurrent climate change produced crises.

IMF to factor climate change into World Economic Outlook from 2016

This month the Bank of England’s Prudential Regulatory Authority issued a report highlighting the risks that climate change poses for insurers, financial stability and the economy. It says that insurers may face increasing climate change risks from three key factors:

- the physical impacts of climate change (e.g. increasing claims due to damage from extreme weather)

- liability risk (companies and directors may suffer future claims from those impacted by climate change, which may also impact those providing liability insurance)

- transition risk (carbon-intensive financial assets are likely to be re-priced as we transition to a low carbon economy).

Reflecting these concerns, the head of the International Monetary Fund (IMF) has said that climate change is now a “macro-critical issue” (i.e. critical to the achievement of macroeconomic goals). As a result, the organisation will begin to factor the impact of climate change into its World Economic Outlook forecasts from 2016.

GDP negatively impacted by climate change

Continuing on the economic theme[3], a report published this month found that climate change is likely to reduce global economic production by 23% by 2100. Furthermore, 43% of countries are likely to be poorer in 2100 than they are today if greenhouse gases (GHG) are allowed to grow on the current trajectory. Climate change is also likely to exacerbate the growth difference between developed and developing countries (as demonstrated in Figure 2). However, the study found that if the pledges that countries have given ahead of the climate negotiations in Paris next month are met, the warming cost in 2100 should drop to 15%. 

Encouraging political progress, but more needed

It is therefore encouraging that analysis of the national emission reduction pledges submitted ahead of the climate conference in December show significant improvement on previous analysis. Global temperatures are now forecast to rise 2.7oC by 2100 if countries continue the current rate of emissions reduction post-2030. If countries go no further than their current pledges than the level of global warming is projected to be 3.5oC.

OECD analysis of 44 national pledges and their implications for the average annual reduction in emission versus historical performance (see Figure 3), shows emissions reduction trajectories need to change significantly. For example, the US would have to cut its emissions by 2.3-2.8% a year to meet its post-2020 targets, compared to an average annual reduction of 1.6% during 2005-12. Meanwhile, the EU would need to cut its GHG emissions by 2.8% per year versus a historical reduction rate of 1.8%. This implies that in order for countries to meet their targets there will need to be material policy adjustments supporting the growth of a low-carbon economy and providing confidence to investors.


[1] “Catalogue of abrupt shifts in Intergovernmental Panel on Climate Change climate models”, Proceedings of the National Academy of Sciences, October 2015 edition


[3] “Global non-linear effect of temperature on economic production” Burke et al. Nature, October 2015



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