There has been a lot of talk in Canada lately about the financial costs achieve the country’s climate goals. And rightly so. The situation is urgent and we must act now.
Tackling climate change will require a concerted effort, affecting all sectors of the economy. And while there will be great economic opportunities and many new jobs in the green economy, there will be considerable disruption in the workforce, major economic challenges, and significant capital investment needed.
However, in the financial industry, we like to look at both sides of the ledger. And when you consider the damage to the Canadian economy that can be expected from fires, floods, melting ice caps and loss of biodiversity due to climate change, investment in greenhouse gas reduction greenhouse is starting to look very profitable.
Climate change harms economic prosperity
In a new study we recently published with the Institute for Sustainable Finance, we posit that economic value is sacrificed every day that action is not taken to mitigate the economic and ecological risks posed by climate change. Existing business models agree that losses are inevitable without change or investment. But questions remained about how much value will be lost and how quickly.
Our study modeled the physical risk to Canada, or the amount of capital production that could be lost, under various warming scenarios by the end of the century. We found that in a business as usual scenario, without new international greenhouse gas mitigation measures, allowing the climate to warm 5°C by 2100, the cumulative cost to Canada would be 5, $5 trillion.
It’s a big number. And that’s much higher than the damage we would see in a scenario where global warming is kept to 2C, which we estimate at around $2.8 trillion.
Of course, this is just the financial cost and does not take into account the suffering of those who will lose their livelihoods, homes and businesses, and even their lives, to climate-related disasters.
Our study further reveals that the costs associated with physical damage exceed the investments required to reduce greenhouse gas emissions. In fact, the difference is up to $45.4 billion greater than the required investment. And that doesn’t even take into account the potential economic benefits of transitioning to a low-carbon economy.
Yes, it is true that Canada cannot fight climate change alone and it is a global effort. But the incentive is clear for a wealthy, developed and industrialized country like Canada to assume a global leadership role and respond our own net zero goals.
Quick action is crucial
There is also a strong incentive to act now, as we will face inflection points in the coming decades that will make the challenge considerably more difficult.
Our study found that the damage costs of climate change are projected to increase gradually until 2050, at which point there is a sharp increase in all scenarios. In 2070, there is an exponential increase in damage. These dates correspond to two of the important target dates for reaching net zero noted by the Intergovernmental Panel on Climate Change in his reports.
Despite the increased attention given recently to the fight against climate change, progress has been too slow. It is becoming clear that we are unable to limit global temperature increase to 1.5C above pre-industrial levels by 2100. Estimates by the IPCC and others suggest that with current progress , and if the world meets its existing commitments, we are more on pace with a 3°C warming scenario. There is a very real risk that the warming will be even higher.
This is bad news for Canada, which is highly susceptible to the impacts of climate change and is warming twice as fast as the global average. But so far we have not had an effective assessment of the physical risks and the potential capital cost to Canada.
We have a lot to lose. And it should now be clear that tackling climate change is more than profitable in terms of physical damage avoided alone.