Saving the ecosystem – 30 Jun 2022

Increase in average global temperature by 0.04 °C per year would reduce world’s real GDP per capita by more than 7%

Now everyone, everywhere, agrees or at least experiences first hand the irregular weather pattern caused by insane human actions! And if not reversed, with some targeted interventions into the way we produce and consume things, this pattern will get worse and worse over time until the mother earth becomes unlivable for all species. It will metamorphose into Mars which, astrophysicists believe, might have had all life-supporting conditions in the past but it is now anything but livable.

The earth’s climate has changed throughout its history. According to some estimates, just in the last 700,000 years there have been 7 cycles of glacial advance and retreat with the abrupt end of the last ice age about 11,700 years ago marking the beginning of the modern climate era — and of human civilisation. Most of these climate changes are attributed to very small variations in earth’s orbit that change the amount of solar energy our planet receives.

But substantial evidence is available through direct observations made on and above earth’s surface that planet’s climate is significantly changing at a rate that is unprecedented over millennia, and human activities since the mid-20th century have been the primary driver of those changes. The carbon dioxide and other gases have the ability to trap heat. Evidence from ocean sediments, tree rings, coral reefs and layers of sedimentary rocks indicate that CO2 from human activity is increasing more than 250 times faster than it did from natural sources after the last Ice Age.

Let us look at some data and see what is happening in and around the earth making it hostile for living in the foreseeable future. The planet’s average surface temperature has risen about 2 degrees Fahrenheit (1 degrees Celsius) since the late 19th century. The years 2016 and 2020 are the warmest year on record. Global sea level rose about 8 inches (20 cm) in the last century. Spring snow cover in the Northern Hemisphere has decreased over the past five decades and the snow is melting earlier. The survival of coral reefs, considered the ‘rain forests of the sea’, and host around 25% of marine species, is in danger. Atmospheric CO2 is absorbed in the sea and lowers the pH of seawater threatening the survival of coral reefs.

What does all this tell us about the existing economic order and its sustainability? A study by researchers from the IMF and University of Oxford show that a persistent increase in average global temperature by 0.04 °C per year would reduce world’s real GDP per capita by more than 7% by the end of 21st century. Climate-vulnerable countries pay a higher risk premium on their sovereign debt

Foreign Direct Investment tends to be lower to locations that are more vulnerable to climate effects such as increased rainfall and flooding, warm temperatures and droughts. Firms in vulnerable climates (major storms, flooding, heatwaves) have lower and more volatile profits and cash flows, hold higher amounts of cash and use long-term debt. Financing is also costly for firms exposed to climate change. Investors demand 92 basis points higher return to invest in firms affected by severe drought conditions.

These numbers, though large, are an underestimate according to a recent large survey of CEOs, academics and bankers. The picture is not all gloomy, though. Climate change can be turned around if there is global consensus on actionable policies. It is estimated that spending about 3% of global GDP on reversing climate change through reforestation, investment in renewable energy and cleaning the oceans can have a substantial impact.

There is already good work underway around the world. Some countries have started discouraging carbon emissions and promoting the use of green renewable energy sources. Evidence from recent studies suggests that financial markets have started pricing carbon related risks. Investors demand higher returns to invest in the stocks of firms with higher total CO2 emissions. Likewise, banks charge higher interest rates and use more covenant restrictions to lend to firms responsible for adverse climate incidents such as oil spills, excess carbon emissions and deforestation projects. All these actions, though admirable, are not enough to save the ecological disaster. Countries and MNCs need to do more and on sustained basis to thwart climate calamity.

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