Climate change could reduce global GDP by more than 4%

Standard and Poor’s Global raises the alarm and explains which areas are most at risk

Climate change could cause the loss of 4.4% of global GDP every year, starting from 2050.

The alert comes from a study by Standard and Poor’s Global Rating, which explains that it is possible to avoid this disastrous scenario for the world economy only by keeping temperatures well below +2°C compared to the pre-industrial period (1850-1900 ).

The first point clarified by the S&P Global report “Lost GDP: Potential Impacts Of Physical Climate Risks” is that climate change is not ‘just’ an environmental problem, but also a financial and social one.

Global warming, mainly caused by emissions of greenhouse gases resulting from human activities, already has tangible and negative effects on the living conditions of millions of people, on biodiversity, on food and water security, on health and on human rights.

But what is the financial cost of climate change? Which sectors and countries are most exposed to climate-related physical risks and the possible solutions to mitigate climate change before the consequences become irreversible?

The economic impact of climate change

As mentioned at the beginning, according to S&P the consequences of climate change can lead to a loss of 4.4% of GDP every year in less than thirty years, starting from 2050. An alarming figure, if we consider that global GDP in 2020 it was around 84 trillion dollars, according to the International Monetary Fund and therefore the loss would be over 3 trillion dollars. It would be like lose the GDP of Germany, the United Kingdom or France every year. The report uses four climate scenarios to examine the potential exposure of 137 countries to economic losses caused by physical climate impacts.

It is also possible to evaluate the damages by considering the growth trend of losses in the insurance sector which from 1992 to 2022 grew on average by 5%-7% per year due to natural disasters. Swiss Re data certifies that The most extreme weather events cause the most insurance losses.

Then there is another trend highlighted in the report that casts (even more) shadows on the future: it is probable that the impacts of these risks are not linear, as has already happened historically. In practice, the marginal increase in temperature produces more damage the higher the starting temperature. In the future, climate change is therefore likely to become exponential once certain tipping points are reached.

What are the climate risks

The rating agency with a focus on sustainability has identified 7 types of climate risks:

– Heat waves;

– Drought;

– floods;

– storms;

– fires;

– sea level rise.

Using historical loss rate data associated with these risks, S&P then estimated the potential economic impacts. What emerges from the research is that the spread of physical climate risks it gradually erodes the production capacity of countries for various reasons: investments are weaker because the fear of losing everything due to natural disasters increases, there is lower productivity, mortality rates become higher and capital is lost.

Taking into consideration a scenario defined as “slow transition”, S&P Global Ratings uses three parameters to evaluate the economic impacts of physical climate risks:

the exposure: the percentage of GDP or population that may be put at risk by climate change;

GDP at risk: the value of GDP that could be lost each year due to climate risks, expressed in absolute value;

readiness: Indicates the ability of countries to respond to some of these losses based on their economic and institutional strength.

The report assumes a scenario of 3°C warming by 2050, in line with countries’ current climate policies. However, if greenhouse gas emissions continue to grow at the current rate, warming could be even greater, with even more serious consequences for the world economy.

The territories most exposed to climate risks

The report also highlights that the cost of climate change is not distributed evenly across countries and economic sectors.

The paradox arises whereby, on average, those who suffer the worst consequences of climate change are the countries that have contributed the least to air pollution. The poorest and hottest countries, in fact, are those that suffer the greatest losses due to their greater exposure and vulnerability to climate impacts, their lower adaptive capacity and their dependence on climate-sensitive sectors, such as agriculture and tourism.

[Scenari di danni economici da crisi climatica – Fonte: S&P Global]

It is evident, therefore, how between the different territories risks and investment needs also vary.

For example, the report estimates that the GDP per capita of sub-Saharan Africa and the MENA area (Middle East and North Africa) could decrease by 8% by 2050 due to climate-related physical risks, while South Asia may lose even 12% of GDP, three times the expected loss globally.

[La previsione sui fenomeni climatici estremi. Fonte: S&P Global]

On the contrary, in S&P estimates, Europe and North America would be less exposed and the risk would be 2% of their GDP. We also remember a recent Oxfam-SEI report which shows that the richest 1% of the population pollutes as much as 2/3 of the global population.

It must also be underlined that climate change is bringing about in recent years extreme events even in those traditionally mild territorieswhere phenomena such as drought, floods, storms, fires and sea level rise did not exist.

These events can cause extensive damage to infrastructure, property, economic activities and human lives, as well as generate adaptation and reconstruction costs. To this it must be added that climate change can have indirect effects on the world economy by weighing on supply chains, trade flows and migratory movements.

Extreme events in Italy

Italian companies are particularly affected by the extreme nature of the phenomena, according to data from the Eib Investment Survey 2023, an annual research carried out by the European Investment Bank (EIB) on a sample of 13 thousand European companies.

The survey explains that Italian companies are among those that have suffered the greatest damage from extreme climate events: overall 73% of companies were damaged, less only than Spain (80%) and Portugal (79%). The Italian percentage is 9 percentage points higher than the average of companies that have suffered losses related to climate change, which stands at 64%. This last figure is also very alarming if you consider that it grew by 7% in just one year (in 2022, 57% of companies had been damaged).

The Italian figure is closely related to the increase in phenomena: in 2010, 19 extreme events occurred in the Bel Paese, in 2022 they rose to 310, of which 104 floods, 81 tornadoes, 29 destructive hailstorms, to name the most recurrent ones ( Legambiente data). An exponential growth which, according to research by the ICSR (International Center for Social Research) could make Italian companies spend, overall, up to 3.24 billion euros per year to repair damage but also to protect ourselves from environmental risk.

A situation that has its own social implications, known by the term “Eco-anxiety”, a fear that involves almost 1 in 2 Italians!

Possible solutions

In conclusion, the Standard and Poor’s Global Rating report reiterates that climate change represents a serious and urgent threat to financial stability, which requires rapid and decisive action by governments, businesses and civil society. In reality, the much feared threshold of
+2°C compared to the pre-industrial period has already been achieved
(and passed) last November 17th and the time available doesn’t seem like much.

The main objective remains to reduce greenhouse gas emissions, in order to limit global warming to 1.5°C, as foreseen by the 2015 Paris Agreement registered in COP 21. The 28th edition of the Conference of parties, underway in Dubai, has the task of finding shared solutions to combat climate change. To achieve this goal, effective and ambitious policies are needed, which incentivize the transition towards a low-carbon economy, based on renewable energy, energy efficiency, sustainable mobility, technological innovation and the circularity of materials.

At the same time, they are necessary adaptation policies, which help the most vulnerable countries and sectors to cope with existing or unavoidable climate impacts, increasing their resilience and resilience. These policies must be integrated and coordinated at local, national and international levels, taking into account the different needs and opportunities of the different actors involved. However, when it comes to moving from words to deeds, agreements cannot be reached and particular interests continue to prevail.

If only in November, COP President and Minister of Industry of the United Arab Emirates 28 Sultan Al Jaber expressed doubts about the possibility of giving up fossil fuels without “returning to the cave age”. He says he was misunderstood and that he has faith in science.

Meanwhile, S&P has also raised the alarm, trying to leverage what, for some operators, may be most worrying: the economic-financial loss that the world population is facing without a decisive reversal of direction.