More than 60 central banks, including the Reserve Bank of Australia and the Bank of England, have warned that global GDP could fall 25% below the expected level by 2100 if the world does not act to reduce global greenhouse gas emissions.
They suggested if the world acted to limit emissions to net zero by about 2070, giving a 67% chance of limiting global heating to 2C above pre-industrial levels, the impact of the climate crisis on global GDP could be about 4%.
The estimates are included in scenarios published by the Network for Greening the Financial System, a collection of 66 central banks and supervisors and 13 observer institutions. Described as the first of their kind, the scenarios are designed to guide bankers and financial regulators, including Australia’s Prudential Regulation Authority (APRA), in assessing the climate risks to the economy and financial sector.
Their launch follows warnings from financial regulators of the economic threat posed by the climate crisis. Former Bank of England governor Mark Carney last year warned it was possible the transition needed to tackle the climate crisis could result in an abrupt financial collapse, and the risk of collapse would grow the longer action was delayed. In Australia, APRA board member, Geoff Summerhayes, warned climate change posed a material risk to the entire financial system and urged companies to start adapting.
In a statement released overnight Wednesday, the Network for Greening the Financial System said the changes to the climate were unprecedented. Frank Elderson, the chair of the network and an executive board member of De Nederlandsche in the Netherlands, summarised: “Climate change leads to financial risks and therefore remains a vital issue for central banks and supervisors to address.”
The network said understanding the financial risks and economic costs required it to examine scenarios stretching decades ahead.
It considered three possibilities: under its orderly scenario, climate policies would be introduced soon and gradually tightened, limiting the risk of physical damage – including extreme weather events – and the impact of the transition to low emissions. It would be expected to lead to a “relatively small” economic impact of about 4% of global GDP by 2100.
Under the “disorderly” scenario, climate policies would not be not introduced until 2030, and the emissions reductions needed would be more abrupt than in an orderly world. It was estimated to have a significantly larger economic impact, with nearly a 10% reduction in global GDP below what would otherwise be expected.
In the third scenario, described as a “hot house” world, action to deal with the climate crisis would be limited to current policies only. Countries’ international commitments would not be not met and physical risks would be greatly increased as global emissions kept rising until 2080, leading to more than 3C of warming.
The network estimated the physical damage caused under this scenario could wipe out up to a quarter of annual global GDP by the end of the century. But it warned this could be an underestimate as it was not possible to adequately account for all risks, particularly from high impact events such as significant sea-level rise, extreme weather and societal changes that could be triggered by climate-related migration and conflict.
“As a result, damages in this scenario will be larger than models suggest, particularly in regions with lower resilience and capacity for adaptation,” the network said.
Emma Herd, chief executive of the Investor Group on Climate Change, said the scenarios clearly demonstrated that climate change was a systemic economic threat that would undercut prosperity and job security. She said a low-emissions transition was inevitable, and would be cheaper and much less damaging if there was early action. In Australia, it would require a stable long-term policy framework and a commitment to net-zero emissions by 2050.
“The alternative is sitting on our hands which will continue to expose Australia to decarbonisation efforts across the world while not gaining access to new opportunities that will stem from modernising the economy,” she said.
The scenarios will inform an APRA climate risk vulnerability assessment that was expected to be finished by September before being delayed by the Covid-19 shutdown. Herd said they should lead to companies consistently disclosing their exposure to climate risk, rather than “cherry picking” scenarios that suited their business strategy.
“Governments should also apply these climate scenarios to their own policy decisions, including Covid-19 economic recovery efforts, to ensure taxpayer expenditure is not put at risk by locking in support for carbon-intensive activities,” she said.
On Thursday, the Australian Energy Council – representing all major electricity and gas companies – joined business groups, banks, major miners, the ACTU, institutional investors, all state governments and the federal opposition in calling for the government to adopt a target of net zero emissions by 2050 consistent with the Paris agreement, and for the introduction of stable national policies to set a path to the goal.
It followed the opposition leader, Anthony Albanese, setting out Labor’s hopes for a bipartisan agreement to end more than a decade of political brawling over climate and energy policy. The government rejected both calls.