Sooner Or Later, Climate Change Is Coming For Your Wallet

Last week Gary Gensler, the chair of the Securities and Exchange Commission, made what seemed like an uncontroversial statement: “I think we can bring greater clarity to climate risk disclosures.” The SEC, he said, will begin to consider requiring public companies to tell their investors how climate change could threaten their business. That’s an important step, because for as much as we know about how the climate crisis is changing our lives, we’re only starting to get our heads around what it will truly cost you and me.

The oil and gas industry is already pushing back. Industry groups are stepping up lobbying to avoid disclosing their emissions, according to the Financial Times. These short-sighted attempts will unfortunately hurt our economy.

According to a report released in April by SwissRe, the global reinsurance company, the U.S. economy stands to lose 10% of its economic value by 2050 under a worst case scenario, where average global temperatures rise 3°C compared to pre-industrial levels. The SwissRe “worst case” scenario, however, is our current reality—one in which temperatures remain on their current trajectory, and both the Paris Agreement and 2050 net-zero emissions targets are not met.

To some, SwissRe’s projection of a 10% loss in 30 years may not sound alarming. But that datapoint can otherwise be stated as: The U.S. will suffer natural disasters such that it is not expected our economy will be able to recover from them. The prospect of suffering damage so profound that we are unable to economically recover is alarming. And it is not a distant future.

Scientists had hoped that Covid-related disruptions would produce a large reduction in carbon emissions. But the reductions were less than expected. The world produced only 6% less carbon last year than the one before. This modest response to an unprecedented synchronous global shutdown of economic activity puts the scope and scale of current emissions into perspective. To quantify the challenge, the Intergovernmental Panel on Climate Change indicates that emission reduction ranges must be around 45% lower than present to meet a 1.5°C temperature goal.

Weather and climate disasters cost the U.S. economy $450 billion (2.1% of GDP) in 2020, the highest year on record. And we hold the No. 1 spot for the number of disasters year-to-date according to EM-DAT, a database that tracks disasters globally. We also know climate change has made most of these events worse than they would have otherwise been.

The mere 1°C temperature increase that has already occurred has contributed to new water shortages in towns across California, Nevada, Arizona, and New Mexico. Increasing evaporation has also reduced soil moisture, which helps explain the $7 billion to $13 billion cost to insurers from the 2020 wildfires. Costs that will inevitably translate into a higher price tag to you, the consumer.

The future costs of climate change on the U.S. economy are uncertain, but what is worse is that they may be underestimated. Underestimation occurs because projections are often made using an enumerative approach, where losses are valued sector by sector and then tallied to estimate the total impact on social welfare.

In other words, current approaches miss cascading risks, problems that exacerbate other disasters in unforeseen ways. Global supply-chain disruptions are an example of why cascading risks are difficult to model—because all industries can be affected when businesses of all sizes as well as national and subnational governments are interdependent. Economic disruptions from Covid-19 provide a case in point. The pandemic highlighted the vulnerabilities of complex supply chains that are now ubiquitous. As severe weather events continue to worsen, the U.S. economy will continue to suffer shortages — not only from domestic disruptions to products like orange juice, corn, and soy, but also from disasters abroad. The regions that produce most semiconductor chips and rare earth elements, critical in computers, smartphones, aerospace and defence, and medical appliances are concentrated in regions particularly vulnerable to climate hazards.

The economic consequences of climate change are countless. Under the last administration, the U.S. Commodities and Futures Trade Commission released the first-ever assessment of the impact of climate change on the financial system. The 196-page report’s first sentence reads: “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”

The good news is that scientists, economists, and financial regulators agree on what needs to be done—even the oil and gas executives are on board. The key recommendation from the CFTC is that “The United States establishes a price on carbon. It must be a fair, economy-wide price… at a level that reflects the true social cost of those emissions.” The authors go further, stating that “a carbon price is the single most important step to manage climate risk and drive the appropriate allocation of capital.” The SEC’s moves toward mandatory climate risk disclosures are first steps on that path.

But if you’re not in a position to influence the risk calculus of public companies, there is something else you can do. You can buy insurance. The IMF’s researchers find that insurance penetration is a top factor in determining the resilience of a country to the impact of climate change. Yes, it might cost you a little more than you expected to spend this year. But climate change is coming for your wallet sooner or later.

Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 6, 2021

About the authors: Jennifer R. Marlon is a research scientist at Yale University’s School of the Environment. Bianca Taylor is founder of Tourmaline Group and a member of the Bretton Woods Committee. The two are public voices fellows of the OpEd Project and the Yale Program on Climate Change Communication.