The Business Cost of Climate Change: What the Science Says
By ERICA GIES
Honda lost more than $250m in 2011, when car assembly plants in Thailand flooded (pdf) during an especially heavy monsoon season. The next summer, US utility Dominion Resources had to shut down part of its Millstone nuclear plant in Connecticut because water from the Long Island Sound grew too warm to be used for cooling. And reinsurer Munich Re saw its quarterly profit decline 38% after paying out more than $350m in claims from Australia’s 2010–11 floods.
These numbers — from a Center for Climate and Energy Solutions report (pdf) released last year — illustrate the losses many companies have experienced in recent years from extreme weather events. Worldwide, more than 800 weather-related disasters in 2012 — the most recent year discussed in the report — caused $130bn in losses, the third-costliest year on record after 2011 and 2005, according to data from Munich Re.
Now a new report called Risky Business, released two weeks ago, attempts to quantify the probability of these risks for business leaders in their own language. The report is the fruit of a project chaired by former Treasury Secretary Henry Paulson, former New York City Mayor Michael Bloomberg and Thomas Steyer, former senior managing member of Farallon Capital Management. It includes projections for changes in local, state and regional climate conditions across the United States and estimates the fiscal impact of those changes on key sectors of the economy, including agriculture, energy, coastal infrastructure, labor productivity and heat-related mortality.
“We’re already seeing a variety of impacts around the world — on human systems as well as natural ecosystems,” said Michael Mastrandrea, a climate scientist at the Stanford University Woods Institute for the Environment and part of the team that worked on the Intergovernmental Panel on Climate Change’s (IPCC) upcoming Fifth Assessment report on climate impacts and adaptations. “Those impacts are widespread and are having real consequences. Climate change is not just a theory that we expect our children to deal with.”
Ninety percent of companies on the S&P Global 100 Index identify climate risk — such as extreme storms, flooding, coastal erosion, drought, sea level rise, wildfires and supply-chain disruptions — as a current or future threat to business, according to the Center for Climate and Energy Solutions. However, several described the risks as minimal, far in the future, too difficult to quantify or too uncertain to support business decisions (pdf) to invest in resilience.
That interpretation isn’t borne out by current science, said Mastrandrea, who was also an adviser on the American Climate Prospectus (pdf), the technical document that underlies the recent Risky Business report.
The IPCC reports remain the most comprehensive synthesis of climate science (pdf) to date. The panel found a clear linkage between the impact of storms and sea level rise, Mastrandrea said. “Higher seas make the storm-surge impact higher. It raises the averages, so when you get extremes, it’s even worse,” he said. “One foot of the 13-foot storm surge associated with Sandy could be linked to sea level rise we’ve already seen.”
The research also pointed to tightening water supplies, particularly in the Southwest and California, he said.
The Cost of Catastrophe
Among the businesses that are most sensitive to the climate impacts already happening are insurance companies, and especially reinsurers, which essentially provide insurance for insurers.
Munich Re, which has a collection of global data on natural catastrophes dating back to 1980, uses this data to spot trends, such as the uptick in costs for weather-related disasters (pdf), said Peter Hoppe, head of the company’s geo risks research and corporate climate center.
Risks from climate change are often better assessed at a small geographic scale, said Kate Gordon, executive director of the Risky Business project. “By looking at how climate affects specific regions and sectors, rather than at national averages that mask local conditions, our research found that the degree to which any single business may be harmed by a changing climate will depend largely on where that business is located.”
For example, in the Gulf Coast, Northeast and Southeast, sea level rise and higher storm surges are likely to lead to an additional $2bn to $3.5bn in property losses each year by 2030, with escalating costs in future decades, according to Risky Business.
The report projects that extreme heat in the Midwest, Southeast and Southwest — which will likely see several months of successive 95F (35C) days each year — will threaten human health, reduce labor productivity and strain electricity grids.
Labor Costs on the Rise
Because working outside in the daytime heat could cause severe health risks and potentially death, people who work outdoors — such as in construction, utility maintenance, landscaping or agriculture — may increasingly have to work at night, earning overtime or double time.
Outdoor workers are already moving to the night shift in Phoenix and in parts of Florida, Gordon said. Ultimately, productivity of outdoor workers could be reduced by as much as 3%, particularly in the Southeast.
“Three percent may not sound like much,” Gordon said. “But like GDP, it’s a very big number. We don’t ever really lose that much labor productivity. That loss is about the equivalent of losing all of Connecticut’s labor force.”
The independent research team behind the report analyzed low-probability, high-impact climate events, as well as those most likely to occur. “Having a conversation about climate risk is critical to businesses that are making long-term capital investments,” said Gordon, citing power plants, railroads and grain elevators. “People making those decisions are very, very open to a risk conversation.”
The Most Severe Risks Are Still Avoidable
Because greenhouse gases stay in the atmosphere for many years, “there’s a certain amount of climate change baked into system because of our past actions,” Mastrandrea said. Even if all human-caused emissions stopped immediately, pollution already emitted will continue to warm the Earth and the oceans for decades or longer.
On the bright side, the findings also show that businesses can still avoid the most severe risks by making early investments in resilience, as well as taking immediate action to reduce the pollution that causes global warming. “Climate change is nature’s way of charging us compound interest for doing the wrong thing,” Tom Steyer said. “The longer we wait to address the growing risks of climate change, the more it will cost us all.”
Erica Gies is an independent reporter who covers water and energy for The New York Times, The Economist, Scientific American and other publications.