The economics of the climate emergency

Can we afford a climate emergency mobilisation?

 It is a very odd question, isn’t it? Can we afford to take action to address an existential risk? One that experts tell us could trigger the largest economic crisis in human history, with the possible collapse of civilisation. Imagine doing a cost benefit analysis of that!

But this question, of the economics, has been at the core of the climate debate for decades.  What is the cost of acting, who will pay for it, which countries will lead, will the consequences be fair, who should be compensated?  That whole debate was predicated on an idea that is now clearly wrong - that if we didn’t act, the economy would carry on, as it had been, and therefore action on climate change imposed new costs and risks to the economy.

We now need to jettison all that and start again. The economics of our situation today - and of a climate emergency mobilisation - are completely different. There are three key reasons:

  1. The cost of not acting in emergency mode could be the collapse of the global economy. A collapse is not certain, but the consequences would be so great, it would quite irrational to ignore the risk. Whatever the ‘cost’ of acting is, it will be less than the ‘cost’ of collapse.

  2. It seems increasing likely that a well-managed emergency mobilisation would be enormously beneficial for the economy and society, driving innovation, creating wealth and enhancing quality of life globally. Not just better than the alternative risk of collapse, but better than today.

  3. With the historical assumption of ‘action = cost’, the follow-on assumption was that action would therefore only occur through policy intervention (e.g. a carbon price). This is now totally flawed. Firstly, already today, action does not always equal extra cost, in fact it often lowers direct costs and even more often, indirect costs. Secondly, we live in a modern globalised and highly connected market economy - financial risk is managed based on constantly adjusting assumptions about changes in future policy, physical risks, public attitudes and the complex interplay and sometimes contagion [FN1] between these factors. Together these unleash powerful drivers that are currently effecting and will also soon accelerate change.

Understanding and accepting these shifts in assumptions is crucially important because the economic debate will be central to both the process of both deciding to embark on an emergency mobilisation and to managing it well.

As described above, there are three aspects to consider. The cost of not acting, the consequences of acting and how change is likely to occur in a globalised market.

The Economics of not acting – the path we are on today

As the evidence we covered earlier shows us, it is clear that the path we are currently on has profound economic implications. The climate crisis:

  • Presents a serious threat to global economic and social stability;

  • Could trigger widespread geopolitical conflicts driven by famine and people movement; and

  • Poses a material risk of full-scale global economic collapse.

This much is clear from the science.

The science of the climate system can be relied upon because it is based on the fundamental laws of physics and chemistry. It still has areas of uncertainty and complexity, but the overall conclusions provide a clear and reliable basis on which to make judgements and determine action.

Economics is not a science. It is so heavily influenced by human behaviour and by unpredictable interactions with the societal, ecological and climate systems, that forecasting the outcome from different paths is more challenging. An example would be famine exacerbated by climate change creating mass people movements which drove geopolitical conflict and resulting economic uncertainty.

Nevertheless, we do have enough analysis on which to make reasonably well-informed judgements, despite the uncertainty. The IPCC’s analysis for example suggests that 1.5 degrees of warming would create estimated economic costs of around $54 trillion. At 3.7 degrees this cost increases to $551 trillion - equivalent to all the wealth in the world. We are currently on the path to 3 – 5 degrees.

Even at this early stage of impacts, market awareness of these risks is rapidly growing. This was recently argued by Feike Sijbesma, CEO of Royal DSM and Chairman of the CEO Climate Leaders of the World Economic Forum:

“The financial world is becoming nervous. The Financial Stability Board, established by the G20, and several central banks, are warning about climate-related financial instability. Investors want companies to disclose more climate related-risks. Insurance companies warn that failure to reduce greenhouse gas emissions could result in a world that is ‘pretty much uninsurable’.”

The market evidence to support Sijbesma’s view is strong. Losses from the physical impacts of the climate emergency are already being felt with a five-fold increase in insured losses in past three decades. With one-third of global equity and fixed income assets in carbon exposed sectors there is increasing concern that the inevitable slump in the value of fossil fuels could trigger another global financial crisis. Growing awareness of this risk is in turn driving divestment, with funds that have committed to exclude or restrict fossil fuels increasing from $52 billion in 2014 to now over $11 trillion in 2019. This is a staggering increase in just 5 years.

Much harder to measure but probably even more significant, is the economic cost of the political instability, geopolitical upheaval and military conflict that climate change will almost certainly bring with mass relocations, refugees and the high likelihood of ongoing food crises.

Given this wide range of economic impacts, and particularly given the near certainty of the physical forces driving them, it is hard to justify any rational argument that we ‘can’t afford’ a climate emergency mobilisation. In fact, the overwhelming logic suggests that, economically, we can’t afford not to embark on such an approach.

The economic consequences of a climate emergency mobilisation

It would certainly be expensive to conduct a full-scale emergency mobilization. However, ‘expensive’ is a subjective reference point. It can only be considered relative to the cost of not acting and to the economic results of the mobilisation, including its economic benefits.

The whole area of modelling something that has never occurred before is challenging. There are however useful reference points that can guide us in regard to the costs. For example, assessments of dramatic emissions reduction programmes concluded they would require in the vicinity of 1-3.5% of GDP. It is reasonable to assume a full-scale emergency mobilisation, which would be much faster and more disruptive, would require in the range of 5-10% of GDP dedicated to the task. This compares to WWII for example, where the war effort required 30 – 50% of GDP in key countries involved, though for fewer years than a climate emergency mobilisation would likely last. It is a large undertaking, but it is within the parameters of what can be considered doable and reasonable, given the context and the historical evidence of other emergency responses.

More critically however, is the framework in which we consider such things as ‘costs’. Unlike war, where a large amount of the money spent is ‘wasted’ in terms of economic productivity, an emergency mobilization would:

  • Be dominated by investments in productive assets;

  • Deliver clearly beneficial social and economic outcomes;

  • In many cases lower costs for both individuals and society.

Investments in new power generating capacity would bring an economic return for decades. The electrification of transport and the shift to renewable power generation would lower consumers’ costs and dramatically reduce outdoor air pollution, which kills around 4.2 million people each year according to the World Health Organisation. An emergency mobilisation would unleash innovation in technology at a massive scale that would most likely deliver lower cost and more accessible energy supplies around the world, while also enhancing energy security and thus reducing related economic uncertainty and military spending.

Such potential beneficial outcomes have been widely studied [FN2]. From this it seems highly likely society is underestimating the economic and social benefits of an emergency mobilisation. It could in summary leave our energy costs lower, energy supplies more secure, our cities cleaner, more people employed, and human health improved through better diet and cleaner air. It is likely it would also reduce inequality both within and between nations.

While we shouldn’t underestimate the upsides, nor should we ‘sugar coat’ the downsides. There will be significant economic losses. Productive assets that become stranded, market devaluations of major companies, social costs of economic change and many others. These ‘downsides’ also need to be considered. However, they can’t become an excuse to delay as the cost of not acting is so much higher. But they are real costs that need to be understood and managed.

As in all economically disruptive transformations, such as those driven by technology, there will be winners and losers. Based on the historical evidence, it is likely many of today’s major companies won’t survive the transition but will rather be replaced by new companies. This is the normal market process of creative destruction, where incumbents are often replaced by disruptors. While this has social consequences that need to be managed, it is not an argument against policy change. The public good is not negatively impacted by a transition of wealth between sectors and policy should not be designed to protect incumbents.

As has been argued by others, “Policy should protect the future from the past not the past from the future.[FN3]

A crucial question for policy makers, investors and corporate leaders is the question of compensation or other market interventions to deal with private losses. A climate emergency mobilisation will create large losses for some industries and they will argue, as companies always do, that this is ‘unfair’ and ‘unexpected’ so they should be compensated. This would be wrong for two reasons.

Firstly, it is neither ‘unfair’ nor ‘unexpected’. Carbon risk has been well studied and widely debated in the corporate and investment community for decades. So, the idea that private wealth should be ‘compensated’ for choosing to ignore the risk, then seeking to socialise their losses, makes no economic sense.

Secondly, there will be enormous economic demands on the state during this period, including to manage the social consequences of economic change, often referred to as a ‘just transition’. Therefore any ‘rent seeking’ by the private sector should be rejected as it will use state resources needed to legitimately compensate and manage the consequences for the workers and communities affected.

The climate crisis is “not a cliff event..not a shock to the economy. It’s more like a corrosive that is getting weightier with each passing year.”
Mark Zandi, Moody’s Analytics Chief Economist

Modern markets response to climate change - and their likely response to a climate emergency

The central weakness in most assessments of how climate action will occur, and particularly on how it will impact the economy, is the idea of the ‘single big decision’. The questions often asked are: When will this happen? What will be the tipping point? Do we need a major climate catastrophe? When will the world agree on a treaty that then drives globally coordinated policy?

This is a flawed world view, not supported by the evidence of how modern markets work or how major change happens. The reality is much closer to one where millions of small decisions are made throughout a system, that ripple through it, and then, at some imprecise point, that system transitions into a new state. Historians may then refer to a tipping point to explain the shift, but in reality it’s not likely to be a ‘single big decision’.

While there may have been an intense focus in the past year on the climate emergency and the level of existential risk, markets have been analysing and adjusting for increasing climate and carbon risk for three decades, and at a rapidly increasing pace in the past decade.

However, the public debate and most people’s assumptions are still dominated by the now irrelevant framing of ‘action = cost’ and the follow-on assumption that action will only occur through policy intervention (e.g. a carbon price).

This is now totally flawed. Firstly, already today, action does not always equal extra cost, in fact it often lowers direct costs and even more often, indirect costs. Secondly, we live in a modern globalised and highly connected market economy - financial risk is managed based on constantly adjusting assumptions about changes in future policy, physical risks, public attitudes and the complex interplay and sometimes contagion [FN3] between these factors. Together these unleash powerful drivers that are already driving change, and will also soon accelerate it.

The totality of the change driven by the market economy in this way, while powerful, will not drive the emergency transition at the scale or speed required to face the climate crisis. That is why policy remains key. It is however, a critical contributor and influencer both on action but also on the decisions of policy makers. Policy makers will be more likely to act when they see major market players being ready to deliver.

As this all unfolds, there will be many more events and triggers across the system. These should be monitored and understood by anyone seeking to understand how change will occur and how to accelerate it. Examples may include physical climate events and the markets response to them, actions from corporations and regulators, the collapse or creation of industries, major losses or gains in the value of key sectors and disruptors, risk rating downgrades of incumbent corporations or entire countries, protests in the streets, legislative change or a solitary 16 year old sitting on the steps of parliament demanding action.

Examples of economic and financial events

We have created a time-line of what we think are an interesting selection of recent key economic and financial events that are incrementally shifting the market. This timeline includes actions from corporations and regulators, key findings from research and the opinions of influential experts. It is not intended to be an exhaustive list, but just provides examples of the system preparing for what is to come.

If you would like to suggest an addition, you can make you can give us your suggestion here.

  • 2014: Ratings agency Standard & Poors releases report on climate change being global mega-trend for sovereign risk. “Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness, in most cases negatively. The impact on creditworthiness will probably be felt through various channels, including economic growth, external performance, and public finances.”

  • June 2017: The Task Force on Climate-related Financial Disclosures (TCFD) releases final recommendations for companies and other organizations to develop more effective climate-related financial disclosures. The intention being to promote more transparent pricing of climate change risk to support informed, efficient capital-allocation decisions.

  • 2018: FTSE Russell announce that the green economy [FN4] has reached parity with the fossil fuel - “the green economy is now worth as much as the fossil fuel sector and offers more significant and safe investment opportunities”.

  • January 2019: The World Economic Forum’s 2019 Global Risk Report, reports survey respondents have identified ‘Extreme weather events’, ‘Failure of climate change mitigation and adaptation’ and ‘Natural disasters’ as the 3 most likely global risks from a total of 30 risks. ‘Failure of climate mitigation and adaptation’ and ‘Extreme weather events’, were identified in the top three risks, as having the highest global impact.

  • May 2019: 76 major companies ask congress for a price on carbon advising that “Climate is clearly the biggest issue that we have in front of us”. Majors include Royal Dutch Shell, DSM, Unilever, BP, BHP & Nestle

  • June 2019: Task force on climate related financial disclosures (TCFD) releases status report showing 340 investors with nearly $34 trillion in assets under management now require companies to report under TSFD.

  • June 2019: Rostin Behnam, one of the 5 member US Commodity Futures Trading Commission warnsIf climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products — mortgages, home insurance, pensions — cannot shift risk away from their portfolios,” “It’s abundantly clear that climate change poses financial risk to the stability of the financial system.”

  • July 2019: Ratings agency Moody’s acquires majority stake in climate change data firm Four Twenty Seven, signalling a shift in how they will price climate risk into methodologies for assigning ratings.

  • August 2019: The Australian Securities and Investments Commission names climate change as a ‘systemic risk that could have a material impact on the future financial position, performance or prospects of entities’ in it’s rulebook.


FN1 A contagion is the spread of an economic crisis from one sector, market or region to another and can occur at a regional, domestic or global level. Consider this description of climate risk contagion from Rostin Behnam, US Commodity Futures Trading Commission: “Thinking about the flooding in the Midwest and the tornadoes that we experienced this past spring, you have farmland, homes, businesses that are still literally underwater and recovering from the floods. Tied to all of these are personal mortgages, commercial mortgage, or farm loans for purchasing truck equipment, or seed, or any number of farmer needs. When this land is not able to be used there’s going to be an asset impairment which could affect the lender. In that case, you could have a regional bank or a national bank that has a series of loans that are not being paid back. And if they’re not being paid back, I think it’s important that regulators start to think about what risk and what risk exposure those financial institutions have”.

FN2 For further reading on the economic and social benefits of transitioning to a low carbon economy via climate emergency mobilisation see:
The Global Commission on the Economy and Climate (2018) Unlocking the inclusive growth story of the 21st Century: Accelerating climate action in urgent times. World Resources Institute.

IRENA (2019). A New World – The geopolitics of the energy transformation. Global Commission on the Geopolitics of Energy Transformation.

FN3 The phrase “policy must protect the future from the past, not the past from the future”, was originally penned by tech futurist Tim O’Reilly, in 2012, describing the challenge for regulators when confronted with the emergence of disruptive and innovative business models. This now popular phrase has proved useful in helping communicate the climate emergency and the disruptive change that comes with it. Alex Steffen’s 2016 paper ‘Predatory delay and the rights of future generations’, used the phrase to emphasise the absurdity of global policies protecting the institutions causing the climate crisis, instead of responding to the crisis with the speed and scale that it demands. The phase was also used in a recent Breakthrough discussion paper by Spratt & Dunlop ‘The third degree: Evidence and implications for Australia of existential climate related security risk’. In this instance, the phrase was used to urge governments to model future scenario planning around the climate emergency, rather than relying on historic trends.

FN4 The green economy is defined as an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment.