The Wide-Ranging Economic Impact of Climate Change | Lord Abbett
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Economic Insights

The landmark climate report by the IPCC provides a fresh impetus to examine the likely economic costs of a warming planet.

Read time: 2 minutes

The August 2021 report published by the Intergovernmental Panel on Climate Change (IPCC) provides the scientific basis that “unequivocally” links increases in greenhouse gas emissions to human activity. It models the impact of increased emissions on global temperature and provides estimates of how rapidly it may continue increasing under various scenarios for the trajectory of future emissions, along with maximum and minimum estimates for each scenario.

Increases in global surface temperatures are linked to changes in the land biosphere, average precipitation, diminution of Arctic sea ice, ocean temperatures, and sea levels. Human-induced climate change is also linked to an increase in the frequency of weather and climate extremes: heatwaves, droughts, heavy precipitation, and tropical cyclones. These changes and extremes provide the inputs for models that estimate the economic cost of climate change, and the benefits that may be available from various approaches to mitigation of future temperature increases.

Climate Costs

Global temperature had already risen by an estimated 1.07˚C from the 1850 – 1900 baseline by 2015. The most optimistic scenario envisions greenhouse gas emissions declining to net zero by 2050 and turning net negative thereafter. This would limit the estimated increase in global temperature to an average of 1.5˚C by 2081-2100. The middle-ground scenario would result in an estimated 2.8˚C increase, and the estimated worst-case scenario would result in a 4.5˚C increase. Inasmuch as climate change is nonlinear with respect to changes in temperature, the cost of the worst-case scenario is far more than four times as much as what has already been incurred from past emissions.

Public policy responses to climate change range from expenditures to compensate economic agents for the damage caused by climate change that is now inevitable due to past emissions, to expenditures and incentives aimed at mitigating the effect of future changes. The latter include measures such as carbon taxes, subsidies for retrofitting the existing capital stock, expenditure for new “green” infrastructure, and steps aimed at lowering consumption.

The costs associated with various future climate scenarios range across a very wide spectrum, depending on how much mitigation is pursued. Many of them raise costs directly while producing benefits indirectly, and thus pose a dilemma for those who will pay for them. To the extent the costs fall on businesses, either directly or indirectly through increased taxation, they will provoke some combination of offsetting productivity increases, margin declines, and price increases. Thus, who bears the costs of adaptation—taxpayers, workers, shareholders, or consumers—depends on the specific measures adopted. In that sense, climate-change mitigation has much in common with national defense; it is a classic public good with a large price tag, with success defined by what it avoids rather than by what it creates.

Mitigation and Innovation
Nevertheless, the public-private partnership that has made the U.S. the world’s preeminent military superpower has had many spillover benefits for the private sector. It is widely acknowledged that research funded by DARPA1 led to the creation of the Internet and was crucial to the development of the semiconductor industry, among many other innovations. The same could easily result from another partnership aimed at mitigating climate change, as research leads to breakthroughs that make new commercial applications possible.

Lastly, it’s widely believed that the impacts of climate change are disproportionately borne by the poor and other disadvantaged groups. As policymakers become more concerned about rising income and wealth inequality, effective measures to address climate change double as steps to improve social equity.

 

1Defense Advanced Research Projects Agency, a unit of the U.S. Department of Defense.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

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Equity Investing Risks

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Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

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Glossary Definitions

“Net zero” refers to the global goal of achieving a balance between the greenhouse gases put into the atmosphere and those taken out

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