This article is based on a conversation with members of Entelligent’s Climate Risk Investment Exchange, a community of financial industry leaders and policy-makers, co-hosted with the Profitable Ideas Exchange.
When you read climate change assessments or scientific literature from even five or 10 years ago, and certainly 20 or 30 years ago, you find assumptions that forecast most of the worst consequences for sea level rise, severe weather, drought and heat waves to happen in 2050 or even 2100. In fact, these extremes, and their associated damage, are coming much faster and more intensely than we ever expected.
That’s distressing. Yet at the same time, integrated assessment models and the International Energy Agency have consistently underestimated the rate at which the efficiency of wind and solar and other alternative fuels would advance and be adopted. Just as important, they’ve consistently overestimated their cost.
Seen through the lens of these new emerging climate economics, a different benchmark comes into focus framing the impact of climate change against a counterfactual – a business as usual case. The question becomes: How much money can we save by mitigating climate change relative to the impact if we do not mitigate climate change?
If the cost of climate impact is higher than the cost of mitigation, then mitigating creates wealth relative to business as usual. This form of climate change risk and reward is already well understood among people whose job it is to invest and grow capital for the long term. Now it needs to be known by everyone else.
This is a new calculation with new consequences. Those of us in the world of modeling and assessment have tended to assume that climate change was expensive to mitigate but easy to adapt to. What we’re seeing now is that the cost of climate change is coming sooner, faster and higher than anticipated. But the cost of mitigation is also falling more rapidly.
New Math
That means the net economic impact has to be recalculated. And it could mean that in the process, the cost of mitigation may create wealth rather than requiring it.
This recalculation also recasts the motives behind climate change mitigation. When it requires wealth (spending and higher taxation), it turns mitigation into a moral crusade (sacrifice). When it creates wealth via gains on climate investments, mitigation becomes fundamentally financial. In other words, a business opportunity.
The science is evolving very rapidly. But with the big exception of major spending and incentive-laden bills like the Inflation Reduction Act, governmental policies aren’t quite keeping up.
We in the modeling community may have gotten things wrong in important ways – with the best of intentions. But now that we’re seeing those projections change in real time, it creates a fundamentally different environment. It doesn’t make the challenges of decarbonization go away. It just means the long-term impacts on economies and societies may not be what we expected based on the work we did so many years ago.
The need for a new calculation is just as pressing as the response required by climate change. But it changes what that response might look like.
