Investing $1.8 trillion globally in climate adaptation strategies in five areas from 2020 to 2030 could generate $7.1 trillion in total net benefits, finds a new report by Global Commission on Adaptation. In other words, failing to seize the economic benefits of climate adaptation with high-return investments would undermine trillions of dollars in potential growth and prosperity. The report, called Adapt Now: A Global Call For Leadership On Climate Resilience, identifies the five areas as early warning systems, climate-resilient infrastructure, improved dryland agriculture, mangrove protection, and investments in making water resources more resilient. The Global Commission on Adaptation is managed by the Global Center on Adaptation and World Resources Institute.
Earlier in 2015, a study by the Economist Intelligence Unit had estimated the value at risk to 2100 as a result of Climate Change to the total global stock of manageable assets to be US$4.2 trillion, which is roughly on a par with the total value of all the world’s listed oil and gas companies or Japan’s entire GDP.
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Benefits of investing in climate adaptation
“Climate change is one of the greatest threats facing humanity, with far-reaching and devastating impacts on people, the environment, and the economy. Climate impacts affect all regions of the world and cut across all sectors of society. People who did the least to cause the problem—especially those living in poverty and fragile areas—are most at risk,” the report states. It also breaks down the big number into smaller parts highlighting how different sectors are being affected owing to adverse climate activities around the world. For instance:
- Without adaptation, Climate Change may affect growth in global agriculture yields up to 30% by 2050, adversely affecting 500 million small farms around the world.
- Number of people lacking sufficient water will soar from 3.6 billion today to more than 5 billion by 2050.
- Rising seas and devastating storms could force hundreds of millions of people in coastal cities from their homes, with a total cost to coastal urban areas of more than $1 trillion each year by 2050.
- Climate Change could push more than 100 million people within developing countries below the poverty line by 2030.
The Triple Dividend
The report finds that adaptation actions bring benefits in three ways, which it calls the Triple Dividend. The first dividend is avoided losses — how making right investments at the right time can reduce future losses. The second is positive economic benefits through reducing risk, increasing productivity, and driving innovation through the need for adaptation. The third is social and environmental benefits.
It is noted that avoiding losses is the most common motivation for investing in resilience, but such losses usually underestimate the total benefits to the society when taken alone. It is also observed that many of the adaptation actions lead to significant economic, social, and environmental benefits which are more immediate and not dependent on the future state of the climate. Creating better awareness about the “Triple Dividends” will make the economic imperative case for adaptation ever stronger.
Pricing risk
Pricing risk can be a great catalyst for driving actions to mitigate Climate Change. Therefore, it goes without saying true effects of Climate Change in terms of financial impact should be included in all economic analysis and decision making. This can persuade decisionmakers to change behaviors through policy incentives as well as shape better investments — for example, when water is priced to reflect availability, or when rising insurance premiums deflect investments in flood-prone lowlands.
The study, however, acknowledges that putting an explicit price on risk in practice is difficult since there is no single metric, like a price on carbon for climate mitigation, that applies to all sectors and countries. Many climate risks are local, so perils and prices will differ by location. The tools and models available are so far those used by the insurance and catastrophe risk transfer players. “We urgently need better global data on hazards and exposures, calculations of probabilities, and knowledge of local conditions and vulnerabilities in order to successfully price risk,” it asserts.
While governments have to take a lead in the creation of new risk management products, they will also have to look at ways to pool risks across countries, given that the most vulnerable countries are also typically those least able to bear the costs of high-priced risk.
