The “Tragedy of The Horizon:” the Economic Risk of Global Warming

On September 29th, Mark Carney, recently appointed Governor of the Bank of England, gave a speech on the risks of climate change to financial stability at a Lloyd’s insurance event. Carney referred to climate change as the “tragedy of the horizon,” citing outcomes like the impact of rising seas on the world’s coastlines and infrastructure as one of the largest risks to financial stability around the world. Carney cited three major risks to financial stability from climate change.

1.    Climate change presents physical risks

First risk: “The impacts today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade.”

In the context of sea level rise, the impacts of climate change on infrastructure and property along the world’s coastlines are readily apparent. Carney referenced a Lloyd’s study that “estimated that the 20 cm rise in sea-level at the tip of Manhattan since the 1950’s, when all other factors are held constant, increased insured losses from Superstorm Sandy by 30 percent in New York alone.”

Rising seas already compounded the impact of hurricane Sandy, knocking out power grids, flooding subways and causing financial damages estimated to be between $30 billion to $50 Billion. Under current projections of sea level rise up to a 6.6 foot increase is possible by 2100; and as oceans rise so will the physical impact of superstorms.

2.    A changing climate creates liability risk

Second risk: “The impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible.  Such claims could come decades in the future, but have the potential to hit carbon extractors and emitters – and, if they have liability cover, their insurers – the hardest”

Carney suggests that those who suffer the majority of asset loss from climate change could look to hold polluters, governments or private firms accountable for risk exposure.

Nestle is now being sued for the use of water in Southern California and their impact on the California drought. Lawsuits against corporations, governments or private land owners who have shifted the true costs of their behavior onto the commons have the potential to be held accountable for their behavior as extreme weather events become more common and impactful.

Liability for the loss of property and adverse health affects due to climate change are not only held by private firms, but also my American taxpayers. In Alaska, the town of Kivalina is already being displaced by sea level rise and melting sea ice. In response the Obama administration has proposed $50.4 Million in federal aid for relocation costs.

3.    Climate change will create more stranded assets

Third risk: “The financial risks which could result from the process of adjustment towards a lower-carbon economy.  Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.”

What Carney is getting at here is the fact that an assessment of liability will change the valuation of an asset. This includes what is commonly referred to as “stranded assets”, in particular fossil fuel reserves — and the plants that process and burn them — will become useless is a world focused on carbon-free energy.  But it also includes a much greater class of assets that could become stranded, for example real estate on properties that experience frequent and increasing flooding. After the world has seen enough primary property loss and secondary liability loss due to impacts like rising seas our markets will compensate by devaluing at risk assets.

Conclusion

Climate science has been warning us for decades that the impacts of unbridled emissions are on the horizon, but what Carney adds to the conversation is the translation of the risks into financial terms. As acceptance and information about climate change increase so too does the desire to find innovative solutions that build resilience into how we do business and navigate the risks.  Being informed about the potential impact of sea level rise and extreme weather events can help industry and government adapt and keep out of the deep waters of rising seas.

 

By Sam Irvine

Commit to getting informed. Email climate@427mt.com or call (415) 930-9090 to learn more about what climate change means for your organization.