U.K. Report Examines ‘Economics of Climate Change’

October 31, 2006

Sir Nicholas Stern, former chief economist of the World Bank, Head of the U.K. Government Economics Service and Adviser to the Government on the economics of climate change and development, has delivered “the most comprehensive review ever carried out on the ‘Economics of Climate Change.’”

The Review was conducted at the request of the Prime Minister, Tony Blair and the Chancellor of the Exchequer [Treasury], Gordon Brown, who commissioned the report in July 2005. The full report, comments and summaries may be obtained at: http://www.hm-treasury.gov.uk.or the report can be downloaded directly at: www.sternreview.org.uk.

The conclusions warn that unless action is taken the economic effects of climate change will severely impact both the U.K. and the rest of the world. “The Review finds that all countries will be affected by climate change, but it is the poorest countries that will suffer earliest and most,” said a government bulletin. “Unabated climate change risks raising average temperatures by over 5°C [9°F] from pre-industrial levels. Such changes would transform the physical geography of our planet, as well as the human geography – how and where we live our lives.

“Adding up the costs of a narrow range of the effects, based on the assessment of the science carried out by the Intergovernmental Panel on Climate Change in 2001, [See: http://www.ipcc.ch] the Review calculates that the dangers of unabated climate change would be equivalent to at least 5 percent of GDP each year, now and forever.”

The study also warns that, “if a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20 percent of GDP or more. In contrast, the costs of action – reducing greenhouse gas emissions to avoid the worst impacts of climate change – can be limited to around 1 percent of global GDP each year.”

In a comment on the report, Stern noted: “The conclusion of the Review is essentially optimistic. There is still time to avoid the worst impacts of climate change, if we act now and act internationally. Governments, businesses and individuals all need to work together to respond to the challenge. Strong, deliberate policy choices by governments are essential to motivate change. But the task is urgent. Delaying action, even by a decade or two, will take us into dangerous territory. We must not let this window of opportunity close.”

The insurance industry should be particularly interested in the conclusions contained in Stern’s report. They point to increasingly violent storms and shifts in weather patterns, recurring droughts and floods, the inundation of low-lying coastal areas and islands, accompanied by a general disruption of economic activity. Melting glaciers will increase flood risk, while paradoxically reducing sources of fresh water. Crop yields will decline, particularly in Africa. Rising sea levels could leave 200 million people permanently displaced. Up to 40 percent of animal species could face extinction.

All of those risks are to a greater or lesser extent covered by insurance, but the projected losses would greatly exceed the cover available from private companies. Even government insurers would be strained.

The report urges immediate action. “The investment that takes place in the next 10-20 years will have a profound effect on the climate in the second half of this century and in the next,” the summary continued. “Our actions now and over the coming decades could create risks of major disruption to economic and social activity, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. So prompt and strong action is clearly warranted.”

The review focuses squarely on global warming and the role played by greenhouse gas emissions in accelerating the process, and calls for greater efforts to control them. It does hold out some hope that the message is beginning to sink in. “Many countries and regions are taking action already,” the summary notes. “The EU, California and China are among those with the most ambitious policies that will reduce greenhouse gas emissions. The UN Framework Convention on Climate Change and the Kyoto Protocol provide a basis for international co-operation, along with a range of partnerships and other approaches. But more ambitious action is now required around the world.”

The insurance industry is one of the few major economic sectors that has fully realized the perils of inaction in combating climate change. Reinsurers, especially Swiss Re and Munich Re, employ staffs of scientists full time to analyze the problems and find solutions. However, the industry can’t do it alone. If Stern’s report is dismissed as a Cassandra like prophecy of doom, and no action is taken, not only will the industry be hard pressed to survive, but also the entire planet.

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