Simon Sharpe, Director of Economics for the Climate Champions Team and a Senior Fellow at the World Resources Institute, explains why targeted changes to ideas and institutions are needed to mitigate climate change
My contact with the actuarial community on climate change began ten years ago, when I saw Oliver Bettis give his ‘risk of ruin’ presentation. He pointed out that if we cared as much about keeping the climate stable as we do about keeping an insurance firm solvent, then we should aim to limit the probability of a catastrophic outcome – such as an increase of 4°C in global average temperatures – to below 0.5%.1 He then explained that given the amount of greenhouse gases already emitted, it was probably already too late to achieve this. His insight was unusual because it focused on the tail risk, not of an individual extreme weather event, but of the long-term changes in the climate itself.
The worst long-term outcomes of climate change are not generally well understood, because scientists typically focus their research and communications on central estimates – what is most likely to happen. Few in the UK government know that London’s limit of adaption to sea level rise has been estimated at around five metres,2 a level that could be reached by the year 2150 in a plausible worst-case scenario.3 Few people are aware that heat and humidity in hot parts of the world could exceed the human body’s limits of tolerance – conditions never before experienced on Earth – affecting over ten million people each year as early as the 2030s.4 The latest report from the Intergovernmental Panel on Climate Change has no explicit discussion of this issue, not because nothing is known, but because so few research papers have been written on this issue. On the plus side, though, the report does have a special box about the impacts of climate change on wine production, citing 60 different research papers. At least as the world burns, we’ll know where our next drink is coming from.
Ten years ago, the world’s most famous climate change economist, Nick Stern, wrote that economic models of the costs of climate change were so grossly and systematically underestimating the risks that it would be irresponsible to take them seriously.5 The extent to which economic models of the low carbon transition are equally wrong is only just beginning to become clear.
The models suggested decarbonisation could only come at a cost. As Cameron Hepburn, Professor of Environmental Economics, has said, it’s a bit like standing at the beginning of the industrial revolution and predicting that it will bring about a slightly worse version of the agricultural economy. The latest research suggests the shift to clean energy could save many trillions of dollars.6 The models assumed change would be slow. In 2005 analysts expected around 50 GW of solar power to be installed globally by 2020.7 The actual solar PV capacity installed globally by 2020 was 714 GW – more by an order of magnitude.8
Ten years ago, it looked as if fossil fuel assets would only be stranded if policies were strengthened. Recent estimates suggest at least a trillion dollars’ worth of them could be stranded under the momentum that the transition already has.9 How will financial markets react when the fossil fuel system – with sectors linked to it accounting for $32 trillion in fixed assets, a quarter of the global equity market and half of the global corporate bond markets, as well as very large amounts of unlisted debt10 – tips into rapid decline? You would be brave to bet that markets will dampen the impacts and not amplify them. But the assessment of these risks is still in its infancy. Stress testing individual banks is not the same as stress testing the financial system.
When the 9/11 Commission of the US Congress reported on the intelligence community’s failure to anticipate the terrorist attack on the World Trade Center, it concluded that methods of risk assessment that had been carefully developed over decades had not failed; instead, ‘they were not really tried’. The same could be said so far of our institutional approaches to understanding the risks of climate change and the low carbon transition.
If there’s an upside, it’s that there’s room for improvement. With some well-targeted changes to the invisible infrastructure of climate change – that of ideas and institutions – we can make much faster progress without having to fundamentally change our values and preferences, or to wait for a new generation of political leaders. That’s what I argue in my new book, Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change. Find out more at fivetimesfaster.org.
In the second event in the IFoA’s Presidential Speaker Series, Simon hosted a talk on the ideas in his new book. You can watch a recording of the webinar, Five Times Faster – the invisible infrastructure of climate change by visiting the IFoA's Virtual Learning Environment (VLE).
