Sunday, April 25, 2021

Climate Risk Assessment

                                                                                                         written 18 April 2021

                                                                                                     published 25 April 2021



            Risk/benefit analysis demands complete information.  For example, if you hear your team scored 17 points, you can't evaluation the situation without knowing what the other team scored.  Or consider an investment where 999 times out of 1,000, you stand to make $1,000, but 1 time out of 1,000, you lose big.  Without knowing the magnitude of the loss, you can't evaluate the investment.  In this case, if the loss in greater than $1,000,000, the investment is questionable.

            There is currently discussion about infrastructure investment, particularly investment in response to the climate.  Despite some hardcore holdouts, humanity is becoming aware of the problem.  Environmental problems with economic consequences that were once just dire predictions, are now being experienced daily.  The financial community, where long term investments are fundamental, is becoming aware that the uncertainty of a degrading environment is a threat to their entire portfolio.  The reinsurance industry has known this for some time, because they are already paying the expenses of the increasing damage. 

            Last week Scientific American declared that we are in a climate emergency.  This magazine, with long standing credentials, is not making such a declaration lightly, but recognizes the seriousness of our current situation.  An emergency requires attention, and immediate response with resources.

            Four years ago, researchers at the Scripps Institution of Oceanography reported that business as usual creates a 1 in 20 chance of warming greater than 5°C by 2050, due to tipping points in natural systems.  Among their concerns are the collapse of the West Antarctic Ice Sheet with subsequent sea level rise, die back of the Amazon rainforest, and massive release of currently frozen Arctic methane.  Any of these would produce rapid climate changes, risking societal collapse and possible human extinction.  The odds deteriorate to 1 in 4 by 2070.  That gives us an estimate of the odds of our risk, but evaluating the cost of a response requires an estimate of the value of what is at risk.

            The current total worth of the US is estimated at $270T.  This includes $53T in commercial and residential buildings, $105T in public infrastructure, and $112T in financial assets.  The total debt, public and private, is $80T, and our economy generates $21T a year.

            The total worth of the world was recently estimated at $5,000T.  This is probably a high overestimate, but includes attempts to value the natural systems on which the human economy depends.  Global real estate is estimated at $277T, and global financial wealth is estimated at $399T.  These are about 4 times the US values, so a minimum estimate of total global worth might be $1,080T, with $400T in public infrastructure.  The total global debt is $258T, and the global economy produces $84T annually.  The climate emergency risks not only this significant fiscal investment, but all of the social and natural systems that make life possible.

            This global crisis, requires a global response.  To avoid collapse, we must decarbonize the planetary energy system.  Ignoring for the moment the issue of gathering a global political consensus, we can consider the fiscal cost of such a monumental investment.  After decades of denial, we must make significant changes within the next few years to stop adding any more greenhouse gases, primarily carbon dioxide and methane, and begin sequestering carbon any way we can.  An infrastructure shift of this magnitude, over this short a period of time, has never before been attempted, making costs estimates difficult.  

             Total global energy demand is about 18,000 gigawatt equivalents, eighty percent supplied from fossil fuels, about equal shares for electricity, transportation, and heat.  The short time frame demands using technology currently in production, primarily solar and wind, with storage in the form of batteries and probably hydrogen.  One estimate made two years ago suggests a total cost of about $340T.  But prices are dropping precipitately, and such a large effort will produce even greater savings as production ramps up.  Assuming a modest 50 percent savings brings the total down to $170T, still a mind-numbing number.  But spread over 20 years, that is $8.5T a year, which is 10 percent of global GDP, which currently includes $4T annually for fossil fuels.

            This climate emergency is unprecedented, requiring an unprecedented human response, because the downside risk is enormous.  There is no guarantee of success, but I believe it is worth making the effort.