The Real Financial Risks of Climate Change

**Note, the below is a pure opinion piece**

Forget Hollywood

People, pundits, politicians, and even scientists continue to speak of climate change as if it’s some far off event that will affect us someday like a Hollywood version of a global apocalypse that swallows cities whole and ravages the countryside. Climate change is here, it is affecting us now, the risks we face are real, not computer-generated, and they’re only going to get worse in our lifetimes and our children’s lifetimes.

Now, more than ever, knowledge is power. The more we know, the better prepared we can be to hopefully minimize the wide-ranging threats climate change brings to human lives, property, and national economies.

What’s In Your Wallet?

The one risk that everyone understands is financial. Climate change impacts are already expensive and their costs will soon be exorbitant.

Entire agricultural industries, for example, are threatened by changing weather patterns, from higher temperatures to heavier rains or more frequent droughts. The 2011 drought in Texas cost that state’s agricultural and ranching industries more than $6 billion and raised the price of beef for all Americans.

Crop yields decrease as temperatures climb. According to the Intergovernmental Panel on Climate Change (IPCC), every 1ºC/1.8ºF rise in the planet’s normal surface temperature means a 10 percent lower crop yield. In this century, we can now expect a 3°C to 4°C rise in surface temperatures, which means crop yields could plummet by 30 to 40 percent. They’re already declining.

When agriculture is the foundation of a nation’s economy, as it is for countries throughout Asia, Africa, and Latin America, declining crop yields will have a devastating financial impact on everyone, not just farmers. “Decreasing crop yields would shake countries to the core,” warn researchers from the CGIAR Research Program on Climate Change, Agriculture, and Food Security.

Climate change fuels extreme weather events, like the hard rain and high winds of Hurricane Irene and its salt water storm surge which hit the northeastern United States in 2011, devastating farm fields and crops, which was a financial disaster for farmers.

Massive flooding in the third quarter of 2011 contaminated Vietnam’s aquaculture fish ponds, which supply 90 percent of the world’s Pangasius, an Asian shark catfish with mild-flavored white flesh. Without fish supplies, 70 percent of Vietnam’s Mekong Delta Pangasius processing plants had to shut down.

The financial toll of extreme weather events extends far beyond agricultural fields and aquaculture ponds.

A Costly New Normal

In the United States, insurance losses due to extreme weather events in 2011 totaled $35 billion, which translated into $70 billion in economic losses.

Climate change is turning extreme weather events into the new norm. We’ve been told by scientists to expect more heat waves, more record high temperatures, longer and more severe droughts, more violent rainstorms, more frequent and intense snowstorms, and stronger cyclones/hurricanes.

They’re already here. In 2005 in Mumbai, India, three feet of rain fell on the city in just 24 hours. In March 2012, the U.S. set nearly 6,800 high temperature records.

An extreme weather event can damage or destroy necessary infrastructure, from power lines to roads and bridges. That infrastructure has to be repaired or replaced, and that costs money.

An extreme weather event can damage or destroy a home or business, which has to be repaired or rebuilt, and that costs money. Extreme weather events often turn vehicles like passenger cars, big rig trucks, railroad cars, and boats into playthings, leaving them damaged beyond repair, so they have to be replaced. That costs money, too.

Thus far, according to the IPCC, extreme weather events fueled by climate change cost the world approximately $80 billion in physical damage annually, and much more in economic losses.

Those numbers are about to explode. Take one extreme event: tropical cyclones/hurricanes, which are expected to be more powerful because of climate change. They will cause$109 billion in damage annually, particularly to the U.S. and China, according to a joint Yale University and MIT study released in January 2012.

Cyclone damage to tropical island nations, especially in the Caribbean, as well as Central American countries, will cost as much as 37% of those countries’ Gross Domestic Product (GDP). Annually. Those figures do not take into account human casualties—injuries and deaths.

It’s not just local, state, and national governments paying for those losses. Extreme weather events are reaching into the pockets of everyday citizens, too. Insurance companies, for example, have been taking a big hit in recent years and now they’re telling their clients to share the load. Companies like Allstate and State Farm are raising home insurance premiums unilaterally, often by as much as 10 percent. Expect them to go higher still in the coming years.

Climate change is also helping to raise food prices, which affects every citizen.

Canada Calculates the Cost

A study from Canada’s National Roundtable on the Environment and the Economy found that climate change will cost that country CAD$5 billion a year by 2020, and between CAD$21 billion to CAD$43 billion annually by the 2050s.

Those figures are mostly wishful thinking, because they are based on keeping global warming from climbing more than 2°C/3.96°C by 2050, and that’s far from being a given. The caveats don’t end there. The study predicts that the longer climate change impact is ignored, the higher the costs will run. “Our modelling . . . shows there is a risk those costs could not be just higher, but much higher,” declares the Roundtable.

How high is high? Canada could be looking at CAD$91 billion a year if global warming exceeds the 2°C/3.96°C threshold and the country doesn’t implement all of its planned adaptation strategies.

Actually, the costs to Canada will be higher still, because the study only examined three areas—human health, coastal regions, and timber—and climate change affects so much more than that.

Managing the Financial Risk

We can significantly reduce the financial risk of climate change.

First, we can construct the infrastructure we need to protect people, livestock, and property from extreme weather events. Worried about the cost? The cost of doing nothing is much greater. Plus, infrastructure projects create jobs and support construction-related businesses, which strengthens the economy.

Second, national agricultural policies and programs must mandate sustainable agriculture, which will make our farms much more resilient to climate change and much more productive. “Given the region’s current state of food insecurity, climate-smart agriculture has to become the central part of Asia’s [climate change] adaptation strategy,” says Raj Paroda of the Asia-Pacific Association of Agricultural Research Institutions. The same must be said for every other agricultural region on the planet.

Third, plan for comprehensive disaster response now at the local, regional, and national levels. See my earlier article, “Preparing for Trouble: Communities and Climate Change,” for more ideas.