December 28, 2016

Climate Change and Its Costs – What Is at Stake?

Between 0.2 and 0.5 percent of the European Union’s GDP – that is the projected annual cost of climate change in 2080 if no preventive policies are set up. This is the equivalent of 20–65 billion Euros of climate costs annually. These estimates are part of a study on Climate Change Impacts in Europe conducted by the European Commission’s Joint Research Center (JRC) and presented by the organization’s head, Juan-Carlos Ciscar, at an October 6 event in Washington, D.C.

Ciscar stressed that welfare losses related to climate change would be even higher, between 0.2 and 1 percent of the EU’s GDP. A loss in terms of welfare means, for example, that after a flood, the repairing of buildings would increase production but reduce the consumption potential of households, and thus their welfare. Taking into account the EU’s normal annual welfare growth of about 2 percent, the welfare rate would be reduced to 1.8 or 1 percent, respectively.

The study shows that Southern Europe is particularly vulnerable to climate change, in large part because the associated damages tend to increase exponentially as temperature rises. (See Figure 1.) Northern Europe, on the other hand, is the only region that shows welfare gains in all scenarios. This is due mainly to positive climate impacts in the agricultural sector, lower river flooding damages, and higher tourism revenues. However, coastal systems could be harmed significantly, with serious changes to “life as we know it.” In general, the most significant economic damages from climate change occur in the agricultural sector (mainly through losses in production), from the flooding of rivers, in coastal systems affected by flooding, and from migration.

Compared with other studies, the JRC estimates are rather conservative. The International Energy Agency’s (IEA) ‘World Energy Outlook 2009 (WEO) assumes a 6-degree Celsius temperature increase for a business-as-usual scenario, which is higher than the JRC’s projected 2.5–5.4 degree increase and would result in higher adaptation costs. Meanwhile, the widely regarded 2006 Stern Review on the Economics of Climate Change concludes that the costs of combating climate change would level out at 1 percent of global GDP each year, whereas the costs of non-action would rise to 5 percent of global GDP annually. A 2009 JRC report, Economic Assessment of Post-2012 Global Climate Policies, puts the costs of global mitigation policies at 175 billion Euros annually by 2020 (with at total of 666 billion Euro for the post-Kyoto period 2013–2020). This equals between 0.4 and 1.2 percent of world GDP.

The variance in the estimated economic impacts of climate change can be explained in part by the fact that the JRC’s latest study uses lower business-as-usual temperature increases than the WEO, and in part by the observation that there will be regions far more vulnerable to (and affected by) climate change than Europe—for example, small island states and many regions in the Southern hemisphere, particularly in Africa.

To make its projections, the JRC first examines the impacts of climate change on five different sectors— agriculture, river floods, coastal systems, tourism, and human health—in five different regions: Southern Europe, Central Europe South, Central Europe North, the British Isles, and Northern Europe. To gain insight into the impacts across the sectors, these results were then included in an integrated model to show which areas in Europe are most vulnerable. (See Figure 2.) The group modeled scenarios for both 2020 and 2080 and considered four different temperature increases of 2.5, 3.9, 4.1, and 5.4 degrees Celsius.

This multi-sectoral and regionally focused approach provides a clear illustration of which adaptation policies would be most valuable, and where. In his presentation, Ciscar noted that the European Commission considered the results of the study when developing its mitigation and adaptation policies. In 2007, the EU released the Green Paper “Adapting to Climate Change in Europe – Options for EU Action,” followed by the White Paper “Adapting to Climate Change: Towards a European Framework for Action.”

It’s good to know that the EU bureaucracy recognizes that a failure to combat climate change would result in higher costs for the region’s economy. (See Figure 3.) Based on the White Paper, the EU will now review key sectoral policies and then propose legislative measures by 2012. The mills of the EU grind slowly – but they grind!

Figure 1. Annual GDP Losses in 2080 Under Five Climate Change Scenarios (in million Euros), JRC study, p. 94

Figure 2. JRC’s Integrated Approach, JRC study, p. 86

Figure 3. Impact of Adaptation Measures on Damage Due to Low and High Sea Level Rise. Costs With and Without Adaptation Measures, EU Green Paper on Adaptation, p. 10 (based on JRC study)

Guest Article By Annette Knoedler from the Worldwatch Institute and ReVolt

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