The transition to a low-carbon economy will cost far less than the physical damages that will result from natural disasters brought on by runaway climate change, says a new report by the European Central Bank (ECB).
The short-term costs of such the transition off carbon “pale in comparison to the costs of unfettered climate change in the medium to long term,” the ECB writes in a report it is calling an “economy-wide stress test”. The earlier businesses and banks enact policies to drive that transition, the central bank adds, the more they will benefit.
Carbon-intensive industries have been hesitant to implement climate policy measures out of fear that the transition to a greener economy will lower profits or increase production costs. To put those losses in context, the ECB’s stress test evaluated 2.3 million firms and 1,600 banks in three distinct scenarios to weigh the transition expenses they would incur against the costs of damages due to natural disasters. The report considers scenarios where climate policy is implemented early in an orderly transition scenario, is implemented late in a disorderly scenario, or is not implemented at all in a “hothouse world” scenario.
The ECB’s findings indicate that the business world stands to benefit the most from the orderly transition scenario. Although average eurozone companies “would have slightly more leverage, less profitability, and higher risk of default over the next four or five years,” the benefits will eventually outweigh the risks, reports The New York Times.
“By comparison, in a disorderly transition, the company’s profitability would drop more than 20% by 2050 and its probability of default would rise more than 2%. In the hothouse world where no climate actions are taken, profitability would slump 40% and probability of default would be 6% higher.”
The ECB incorporated climate considerations into its monetary policy framework in July, arguing that the effects of the climate emergency and the costs of the transition to a sustainable economy will “affect the outlook for price stability.” While some economists disagree that central banks should be involved in tackling climate change, the Times says, the ECB’s focus on climate will inevitably influence monetary policy and financial regulation.
Other key findings in the report show that the average effects of climate change will increase moderately until 2050. However, those effects will be distributed disproportionately, and damages will be concentrated in certain areas. The ECB says Southern European countries—where climate risk is predominantly from the overwhelming destruction of fires—will suffer more than Northern European countries, which will be most affected by flooding and rising sea levels.
“The results show that if policies to transition toward a greener economy are not introduced, physical risks become increasingly higher over time: they will increase non-linearly, and due to the irreversible nature of climate change, such an increase will continue over time,” the report states. “It is thus of foremost importance to transition early on and gradually, to mitigate the costs of both the green transition and the future impact of natural disasters.”