News out in the last two weeks has illustrated the dramatic impacts of COVID-19 on the overall economy. In the US, GDP contracted by 4.8 percent in the first quarter, and unemployment is at depression-era levels. The European Commission has released forecasts for a “recession of historic proportions”, projecting a 7.4 percent contraction in 2020 across the European Union. Major emerging markets have suffered as well. China’s economy shrank by 6.8 percent in Q1, and Brazil’s economy is expected to shrink by at least 3.8 percent this year. Meanwhile, other major emerging market economies are bracing for the uptick in COVID-19 cases as summer turns to winter in the southern hemisphere, bringing about slower economic growth.
Many have noted that there are parallels to the economic impact we are experiencing as a result of COVID-19 and what could come as a result of climate change. Aside from the economic and financial losses, acute events have a feeling to them. But acute events rarely happen to everyone, everywhere, at the same time. Over the last decade, already locked-in warming from emissions has resulted in several climate-related acute weather events with significant economic loss, including deadly floods in Bangladesh, Hurricane Harvey, and wildfires in Australia and California.
Because both the science and data are clear, we know that climate change is upon us. But data and science haven’t been enough to catalyze widescale action, and perhaps it is because not enough of us have truly “experienced” such travesties. The current global economic contraction is comparable to several acute climate-related events that were felt in very real ways, but always locally. Let’s put data to some of these experiences:
- In 2011, the Thai economy contracted by 9 percent in Q4 following disastrous flooding that many have attributed to climate change;
- In Texas, Hurricane Harvey cost 6 percent of state GDPin 2017, Sandy accounted for 13.5 percent of New Jersey’s state GDP and 5.3 percent of New York’s state GDP in 2012, and Hurricane Katrina cost a staggering 50.9 percent of Louisiana’s state GDP in 2005.
- Global losses from natural disasters over the past decade have cost $3 trillion, and in the US, economic impacts of climate-related events since 2010 have cost $800 billion.
If the economic impacts from COVID-19 can show us one thing, it is that this is what the economic impacts of climate change could feel like. Understanding the economic impacts from floods in Thailand or Hurricane Sandy should have, in theory, driven the behavior of policymakers, investors, and, eventually, consumers, particularly when income and jobs were impacted. After all, each of these climate disasters resulted in their own economic shocks. Yet, action on all fronts has been frustratingly slow – too slow to stem warming to 2°C or less (currently, we are on track for 3°C+ of warming by 2100).
Notwithstanding data and science, it often also takes direct experience to catalyze change. For example, Houston’s Hurricane Harvey brought Southeast Texas’ third 1-in-500 year flood in just three years, and, since Harvey, repeat extreme flooding linked to climate change has homeowners starting to question whether to rebuild at all. In the case of investors, only recently have some markets for coastal real estate begun to show signs that climate risk is on the minds of investors.
If the economic shocks of climate-related events are like the economic shock we are currently feeling at a global level, then COVID-19 can help more of us know what climate risk to the economy could feel like as it unfolds. Of course, not all climate impacts are – or will be – acute. Many will be chronic, gradually degrading economic activity, investor value, and income. Not all extreme events will have such a pervasive system-wide effect on jobs and income as COVID-19 – although, for some emerging markets where economic output is concentrated geographically in vulnerable regions or within a vulnerable sector (like agriculture), climate impacts may indeed have devastating systemic economic impacts.
While we’ve all been experiencing the global economic engine come to a standstill, financial policymakers have focused on how to bring the economy back to full speed, and in doing so, the question of whether (and in some cases how) to integrate climate considerations into an economic stimulus has been at the forefront of many key financial policymakers. For example, IMF Managing Director Kristalina Georgieva has underscored the need for a green recovery as “a bridge to a more resilient future” and has put forth a $1 trillion post-COVID stimulus package that recommends countries direct funding into green and sustainable investments. And recently Mark Carney, the former Governor of the Bank of England, and now Finance Adviser for COP26, described the exercise to build the economy back better through a post-COVID stimulus as very simple: every decision across every part of the financial system needs to take climate into account by reducing climate risks and seeking out climate-aligned opportunities.
With both a pandemic and climate change, the failure to prepare can be extremely costly, and how we invest and grow our economies post-COVID-19 matters. Climate change, like COVID-19, is both a global and a potential systemic issue. Just like climate change, the occurrence of a global pandemic was always a question of when, not if.
But unlike COVID-19, we cannot self-isolate from the risks brought about by climate change. Being prepared, assessing and managing risks, and planning for long-term sustainability will be key to our resilience through either crisis. Perhaps our collective experience of this pandemic will sharpen the senses around the potential economic and financial impacts that climate change could bring about. This, coupled with our knowledge of science and the data and analytics to identify, assess, and quantify climate risks, can perhaps be instrumental for the (inevitable?) policy response to climate change. After all, a post-COVID recovery will not be sustainable for very long if it is not also climate-resilient.
This blog is part of Climate Finance Advisors work on climate risk, and is the first in a series exploring connections between climate risk, finance and the global transition to a net-zero economy. We welcome comments on this blog on our LinkedIn and Twitter feeds.