The economics of climate change

There will be many financial costs (and benefits) associated with tackling climate change, but how can these be predicted?
14 October 2014

Interview with 

Doug Crawford-Brown, Cambridge Centre for Climate Change Mitigation Research


Like it or loathe it, what makes the world go around is money, and business plays a Tokyo Stock Exchangemajor role in that. It generates revenue and provides employment. But staff need to get to work, meaning a transport cost, and businesses need energy to run. So, inevitably, anything that impacts on energy provision, or manufacturing costs - such carbon emissions - will have major ramifications for the global economy. So how can the costs - and benefits - of adapting to climate change be predicted and modelled and then changes implemented? Chris Smith spoke to Douglas Crawford-Brown, from the Cambridge Centre for Climate Change Mitigation Research about the economics of climate change...

Chris -   So, how much might climate change cost businesses then?

Doug -   Well, the first thing I want to say is that there's a difference between what it costs the businesses and what it costs the economy.  So, if for example, I'm the CEO of Tesco.  It might cost me a certain amount of money in Tesco, but if I'm George Osborne, what I'm really interested in is GDP. So, our estimate is that under the worst scenarios of climate change, at least the economic systems are being hit at the level of 2% to 3% loss in GDP, but some businesses will do quite well under that.  They're the ones replacing buildings and so forth.  Other ones are taking terrible hits.

Chris -   To a certain extent, do they not just pass the costs embodied in a more expensive industry straight onto the customer?  So that means that whether we like it or not, we're all going to be paying more because of climate change.

Doug -   I think probably ultimately, that will be the answer. 

Chris -   So, how does someone like you, when you're trying to do sort of mitigation strategies and so on, how do you actually put climate change concepts and predictions into tangible financial terms that will mean something to policy makers, governments, and the person in the street?

Doug -   It takes place in two stages.  One is mitigation - so, those are estimates of how much it's going to cost to reduce the threat of climate change to the level that Emily was speaking about just a moment ago.  So for example, if we say that there's $80 trillion US dollars a year flowing around in the global economy, we think, in order to hit the targets that Emily is speaking of, we can perhaps dedicate 1 - 2% of that GDP to mitigation efforts.

Chris -   But if we're spending that on mitigating climate change, it's not being spent elsewhere, is it?  Which is Peter that we're robbing to pay this Paul?

Doug -   It's that statement in particular that I'd like to sort of put a line under which is that the money doesn't disappear for spending it on mitigation.  It isn't simply being burned.  It's going elsewhere.  So, if one looks at what the cost is, it might be a few percent of GDP going in, but that few percent is not actually being lost.  In fact, if you use the projections from Cambridge Econometrics in the Cambridge area here, you find that it results in a 0.8% increase in GDP globally.

Chris -   Are there also some counterbalancing positives?  So for instance, if I disincentivise people to burn coal and this improves air quality then I end up with fewer people with asthma or an exacerbation of chest problems.  So actually, my doctors are less busy, my A&E department is less saturated, I save money there.  Can one offset some of the benefits of the spend on mitigation in terms of health gains?

Doug -   Some of it can be.  Our estimate is that it's about 20% of the spend that would be saved on healthcare.  So for example, when you reduce greenhouse gases, you also reduce particulate matter and so forth.  And our estimates at the moment are that, if one reduces greenhouse gases by 80%, the health savings from the co-benefits would be about 200,000 fewer deaths per year in the world, about 100 million fewer people getting ill from cardiorespiratory diseases and therefore, a saving of $100 billion US dollars per year that you're not spending on healthcare.  Instead, it's going into...

Chris -   With other direct benefits.  But of course then, there's the - what about the indirect benefits of, if we do prevent the climate changing, we're not going to get the costs of a changed climate which could be an additional burden, couldn't they?  So, it could be even bigger numbers.

Doug -   Well, in the estimate, the current best estimate, although these are really weak estimates at the moment, is that the direct climate impacts roughly of the size - what I just mentioned - for the co-benefits, 100 billion let's say, per year, US dollars being saved.

Chris -   But these are not huge numbers that we have to spend to achieve quite big differences.

Doug -   No.  There are 1 - 1.5% of global GDP in order to make these changes.  I mean, we spent much more than that in the UK on bailing out the banks.

Chris -   How long do we have to exact some of these changes?

Doug -   Personally, I would say that we have perhaps another 5 years to really get serious about the reductions and put in place the financial measures to solve this.

Chris -   So, that's not long.

Doug -   No, it's not.  It's very short compared to what usually occurs.

Chris -   How many times we've missed the Kyoto deadline?  All those stipulations laid down and people say, "We're nearly there."  We never quite made a lot of the time.  Five years is not very long, is it?

Doug -   No, it's not.  Remember I said it's 5 years to get started on it.  We've got until 2015 to solve the problem let's say, but if we wait until 2049 at midnight, we're not going to be able to solve it in the 30 minutes remaining in the year.  We have to have a steady decline between let's say, 2015 and 2050.

Chris -   Sobering words.  Doug Crawford Brown from Cambridge University, thank you very much.


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