A UK chartered think tank and climate scientists say economic models vastly underestimate the potential financial loss from climate change
“Planetary Solvency – finding our balance with nature,” the Institute of Faculty and Actuaries’ (IFoA), fourth report in collaboration with climate scientists, says that global gross domestic product (GDP) could fall as much as 50% due to climate risk shocks.
Economic models vastly underestimate the potential financial loss from climate change and the global economy could face a loss in GDP of at least 50% between 2070 and 2090, the report says, if nothing is done to curb emissions.
The report develops a framework for global risk management to address these risks and shows how this approach can support future prosperity. It also shows how a lack of realistic risk messaging to guide policy decisions has led to slower action than is needed.
In conjunction with scientists from the University of Exeter, the IFoA report asks political leaders to take more action to avoid what they collectively call “planetary insolvency,” a climate disruption to the Earth’s systems so severe it would destabilise society.
Risk management experts at the IFoA criticised the current economic models used by governments and financial institutions, which they say fail to take into account the real risks from climate change and nature loss. They say current economic models do not account for severe climate events like tipping points, irreversible changes such as coral reef loss, the Greenland ice sheet melting and disruptions to the ocean’s currents.
“High-profile climate change assessments in wide use significantly underestimate risk as they exclude many of the most severe risks we could face. Yet it is these extremes that should drive policy decisions,” said Tim Lenton, a climate researcher at the University of Exeter, in the report.
In a situation where the world warms by 3°C or more by 2050, it would likely trigger multiple tipping points, causing over 4 billion deaths. This would lead to the severe breakdown of ecosystems and potentially cause multiple state failures and loss of capital, the report found.
“You can’t have an economy without a society, and a society needs somewhere to live.”
The world has already reached its hottest year on record, putting pressure on central banks and regulators to take action.
The report, the third joint climate risk study by the IFoA following papers on climate risk scenarios and a planetary solvency framework, says politicians and governments must change how they tackle climate change issues. It suggests setting up an independent body within the UN security council that would make annual risk assessments and develop metrics to monitor Earth’s health.
With realistic risk assessments, the report says that real impacts include economic contraction, mass human mortality events, warming of 2°C or more triggering high numbers of climate tipping points, the breakdown of some critical ecosystem services and earth systems, major extinction events in multiple geographies, severe impacts on ocean circulation, severe socio-political fragmentation in many regions, heat and water stress driving the mass migration of billions and catastrophic mortality events from disease, nutrition, thirst and conflict.
“You can’t have an economy without a society, and a society needs somewhere to live,” said Sandy Trust, lead author of the report.
The report proposes a planetary solvency risk dashboard, which would provide information to support policy makers using what they call resilience principles, a set of guidelines for civilisation risk management.
This planetary solvency approach incorporates realistic challenges to the Earth, as well as human society and the economy. The principles include using risk-led methodology, systemic risk assessments, educating stakeholders, collaboration across disciplines, and effective governance and reporting measures.
“Combining science and risk is important; science provides a deeper understanding of the issues faced [while] risk assesses the consequences and recommends actions to mitigate or avoid them,” Lenton says in the report.
“Widely used but deeply flawed assessments of the economic impact of climate change show a negligible impact on GDP, rendering policymakers blind to the immense risk current policy trajectories place us in,” according to the report.
