We’re not climate scientists, and we’re not aiming here to provide a perspective on the politics of climate change, or the prospects of global cooperation. But we are data experts, and there’s a reason the debate on climate change rages on as it does, with various stakeholders arguing from different bodies of evidence. After all, as the global climate continues to change, so will global policy, business, and social climates.
There will be massive changes. The U.S. Federal Reserve Bank, for instance, published a particularly interesting article this March,1 describing the relevance of climate change to a range of macroeconomic issues—potential output growth, capital formation, productivity, the long-run real interest rate, and so on.
There’s also the human cost. The number of deaths globally due to climate change is projected to increase over 600,000 per year by 2030 (compared to 400,000 in 2010).2 Migration will also increase, with some agencies projecting as many as a hundred million climate change refugees in the next two decades. (This accounts for such risks as heat waves; devastation of food security, nutrition, and water safety; rise of malaria and dengue fever; floods; air and water pollution due to extreme weather events.)
Because there’s an enormous cache of climate data and analysis, we wanted to dedicate an article to equipping you with an understanding of the data underlying the climate change debate, to inform your thinking, operations, market position, and general perspective on the topic.
Greenhouse gases and global temperature: What does the data say?
We think of climate change as a fairly recent set of theories, developed over the last few decades or so. Surprisingly, the phenomenon of global warming through the greenhouse effect—the atmospheric accumulation of carbon emissions from human activities—was first predicted back in 1896, by the Swedish chemist Svante Arrhenius. Today, the overwhelming majority of climate scientists concur: The excessive concentration of greenhouse gases — which act as a sort of thermal blanket, trapping the Earth’s heat — cause global warming.3
Since Arrhenius’s prediction, the global concentration of greenhouse gases–primarily water vapor, as well as much smaller amounts of carbon dioxide (CO2), methane, and nitrous oxide–has risen significantly.
A few numbers:
Carbon dioxide: Since the beginning of the industrial era, CO2 concentrations have risen from an annual average of 280 parts per million (ppm) in the late 1700s to 401 ppm as measured at a Mauna Loa, HI, station in 2015 – a 43 percent increase. Almost all of this increase is due to human activities.4
Methane: The concentration of methane in the atmosphere has more than doubled since preindustrial times — reaching approximately 1,800 parts per billion (ppb) in recent years — predominantly due to agricultural developments and fossil fuel use.4
Nitrous oxide: Over the past 800,000 years, concentrations of nitrous oxide in the atmosphere rarely exceeded 280 ppb. Modern-era agricultural practices have driven increases since the 1920s, to the latest high of 328 ppb in 2015.4
The rise in global temperatures is the key evidence of climate change, and the evidence is clear.
In 2015, for the first time global average temperatures exceeded pre-industrial times (taken as 1850-1900 average) by around 10C. Each decade, the planet warms by about 0.20C. At this rate, the Intergovernmental Panel on Climate Change (IPCC) projects that be 2040 the Earth will have warmed 1.50C above the pre-industrial period.5
But our thermal blanket is trapping more heat, and the rise in global temperatures is not only continuing, but seems to be accelerating. Eighteen of the 19 warmest years all have occurred since 2001, with the exception of 1998. The year 2016 was the warmest in the history of global temperature observations.
“Ninety percent of global greenhouse gas emissions come from fossil fuels and agricultural and industrial processes.”
Human activities and climate change: The experts weigh in
In the U.N. IPCC’s Fifth Assessment report, a group of 1,300 independent scientific experts from around the world concluded there’s a more than 95 percent probability that human activities over the past 50 years — specifically greenhouse gas emissions — have warmed our planet.
CO2 is widely used as an indicator representing total greenhouse gas emissions. The U.N. Environment Program reports that total annual greenhouse gas emissions — including from land-use — reached a record high of 53.5 billion metric tonnes in 2017, expressed as CO2 equivalents.6 Compared to 1990, these emissions grew by 64 percent, and CO2 emissions specifically rose 71 percent over the same period. Today, CO2 accounts for more than three-fourths of global emissions.
Ninety percent of global greenhouse gas emissions come from fossil fuels and agricultural and industrial processes. Deforestation, changes in land use, and waste account for the remaining 10 percent.
The main source of greenhouse gases is the burning of fossil fuels. Over the last three decades, this has accounted for 80 percent of the increase in global emissions. Industrial practices — such as chemical, metallurgical, and mineral transformation processes — accounted for 12 percent of the emissions growth.
About six percent of global greenhouse gas emissions come from changes in land use and deforestation. That’s comparable to the amount of emissions from industrial processes. The loss of tree cover not only decreases the amount of CO2 our forests absorb globally, it also contributes to increases, because when trees die they release the CO2 they’d stored.7 Each year our planet loses about 300,000 km2 of natural forests,8 and more than half of tree cover loss is associated with expansion of commodity production and agricultural lands.9
Of course, growing populations demand more and more food and energy, so it’s no surprise the largest economies are the largest CO2 emitters. China and the United States account for 40 percent of total greenhouse gas emissions, and developing Asia is the largest contributor to the growth of those emissions. China, India, and Indonesia alone are responsible for 80 percent of the increase in the last three decades.
Natural factors that could also heat Earth — e.g., solar activity, volcanic activity, and Earth’s orbital changes — have in contrast stayed steady for the last 100 years, and scientists have largely dismissed them as drivers of climate change.
“The number of deaths due to weather and climate events in the U.S. has increased from 281 per year in 1980s to an average of 575 per year between 2010-2018.”
What does climate change mean for daily life?
The rise in emissions means a global temperature increase of 1.50C by 2040 is almost inevitable. If we don’t begin to reduce emissions immediately, the surface temperature will continue to rise through the 21st century, and increases over the pre-industrial period could reach 2.30C by 2040, and might exceed 40C by 2100.5
On the surface, it appears the difference between the business-as-usual scenario and the adoption of an environmentally friendly path isn’t all that big — a difference somewhere between 0.5 and 10C in 2040. Why should we care about one degree? After all, temperatures around us fluctuate by many degrees every day.
One degree separation from ice age
The temperatures we experience locally and in short periods can fluctuate significantly, thanks to predictable cyclical events (night and day, summer and winter) as well as harder-to-predict weather patterns. Globally, however, the average temperature changes very little.
It takes a vast amount of heat to warm the oceans, atmosphere, and land by even one degree. In the past, a one- to two-degree drop was all it took to plunge the Earth into the Little Ice Age. About 20,000 years ago, a five-degree drop buried a large part of North America under a towering mass of ice.10
Species adaptation, fresh water, and food
An additional half-degree Celsius increase by 2040 would be devastating. Heat-wave duration, rainstorm intensity, and sea-level rise would all increase by roughly a third, and increases in extreme weather will cause increases damage and death. Crop and fishery production would fall. Tropical coral reefs would be wiped out.10 Many species wouldn’t have time to adapt. About half the world’s population would experience severe shortages of fresh water11 and increases in food prices.
We already feel this consequence of climate change. The number of deaths due to weather and climate events in the U.S. has increased from 281 per year in 1980s to an average of 575 per year between 2010-2018. The estimated annual damage caused by extreme weather events increased from $17 billion to $82 billion for the same periods (adjusted for inflation).
However, some of the effects of climate change haven’t yet hit our communities. These include an alarming collapse of insect populations worldwide12, melting Himalayan glaciers,13 and ocean acidification.14
Population migration and displacement
A recent World Bank study found that without urgent global and national climate action, Sub-Saharan Africa, South Asia and Latin America could see more than 140 million people move within their countries’ borders by 2050.15
World Resource Institute research11 has led us to estimate that, in the business-as-usual scenario, population living in areas plagued by fresh water scarcity will increase from 600 million in 2018 to more than one billion by 2040.
Risks to financial stability
These include potential loan losses due to business interruptions, as well as bankruptcies resulting from the consequences of storms, droughts, wildfires, and other extreme events. We also see transition risks associated with the adjustment to a low-carbon economy, such as unexpected losses in values of assets or companies dependent on fossil fuels. Even long-term risks can have near-term consequences as investors revise strategies in anticipation of a low-carbon future.1
Climate change is thus relevant to a range of macroeconomic issues, including potential output growth, capital formation, productivity, and the long-run level of the real interest rate. Central banks have already begun to factor climate change into their risk assessments.1
The financial supervisory authorities in a number of countries have encouraged institutions to disclose any climate-related risks, as well as to conduct “climate stress tests.” In 2015, for instance, Bank of England reviewed the U.K. insurance sector’s exposure to climate-related financial risks, and is now conducting a similar review of the banking sector. The European System Risk Board, Sweden’s Finansinspektionen, and Banque de France have also examined the potential impact of climate change or low-carbon transition on financial stability.16
“By 2040 more than one billion people will live in areas facing extreme water shortages”
Policy Perspective: What’s in play?
The data that illustrates the reality of climate change doesn’t in itself offer policy insight, but the global community has blazed a number of paths to address the crisis.
Under the 2015 Paris Agreement, 185 countries — in total accounting for more than 90 percent of global emissions — have ratified the Paris agreement. The Agreement binds signatories in an effort to keep the global average temperature increase below 2°C (relative to pre-industrial levels), as well as to an aspirational effort to limit the increase to 1.5°C. According Structured Expert Dialogue (a scientific arm of the U.N. Framework Convention on Climate Change), even a half-degree rise isn’t compatible with the objective to “prevent dangerous anthropogenic interference with the climate system.”17
Parties to the Paris Agreement also commit a cooperative effort to reduce greenhouse gas emissions to zero by the second half of the 21st century. This would demand a zero-carbon global economy somewhere between 2050 and 2060. Of course, this scenario requires a precipitous global reduction in fossil fuel usage, combined with increases in other energy sources, such as renewables, nuclear, wind, and solar generation increased. The IPCC estimates this would demand an investment of more than $6 trillion (about 6% of global GDP) annually, up to the year 2035.
However, the latest data shows that not only will our current efforts to curb emissions come up short, rates are actually accelerating. Fossil fuel CO2 emissions increased by two percent between 2015 and 2017. Over that period, the successes of some countries — such as the U.S., the U.K., Brazil, and Japan — were more than offset by emissions increases in India, China, Turkey, Iran, Canada, and Russia, which combined accounted for half of emissions increases.
We can explain the divergence between our goals and real practices by pointing to the absence of an underlying market dynamic. Carbon fuel prices don’t correlate with the costs associated with offsetting climate change. Businesses and households that produce greenhouse gas emissions — e.g., driving cars or generating electricity — don’t pay individually for the losses and damage their pollution causes.1 It’s unclear whether we can take on this massive project in a globally cooperative fashion, especially when incorporating countries at different levels of development. The Paris Agreement attempts to create a framework, but it’s complicated, to say the least, to figure out if and how to penalize households and businesses in order to support agencies and make investments in new and relatively unproven technologies.
Even more pessimistically, it’s unclear to what extent global warming can be stopped or slowed. The IPCC estimates that the emissions targets laid out in the Paris Agreement won’t prevent 20C of global warming by the end of the 21st century. Moreover, according to research led by Adrian Raftery from University of Washington, it’s actually more likely that global temperatures will increase from 2 to 40C by 2100.18 If such increases are indeed inevitable, the human race will benefit much more if we shift our efforts and resources away from prevention in favor of developing ways to adapt.
Business Risks and Opportunities
The transition to low-carbon targets creates risks. Environmental policies are unfriendly to major companies and industries that depend on fossil fuels, reducing performance and creating unexpected losses in asset value. (Read more about potential loss estimates in our recent blog post on the future of the energy industry.)
Extreme weather events also create business risks — including interruptions, bankruptcies, and loan losses at banks. On the other hand, they also create openings, such as (slightly cynical) new opportunities for the insurance sector.
As vital resources such as water and food become scarce, we’ll increased instability. For example, by 2040 more than one billion people will live in areas facing extreme water shortages. Competition for these resources could destabilize governments and lead to military conflicts.
Climate change could also potentially reshape global trade routes. For example, Arctic melting could open the North Sea for navigation, dramatically decreasing maritime transportation costs between Europe and the Asia Pacific region.
Businesses and investors can also find opportunities as economies begin to swap carbon-intensive goods and services for innovative low- or zero-carbon substitutes. We’re well aware of green energy and electrical vehicles, but we also see a rise in plant-based alternatives to animal foods — an alternative already in the market — which in the long term could contribute to reducing emissions from livestock.
- Glenn D. Rudebusch, March 25 2019. Climate Change and the Federal Reserve. Federal Reserve Bank of San Francisco Economic Letter. Link
- Climate Vulnerability Monitor 2nd Edition. DARA and Climate Vulnerable Forum. 2012. Link
- IPCC Fifth Assessment Report, 2014. Link
- United States Environmental Protection Agency (EPA). Climate Change Indicators. Accessed on March 20, 2019. Link
- IPCC Global Warming of 1.50, 2018. Link
- UNEP Emissions Gap Report, 2018. Link
- Alina Bradford, April 3, 2018. Deforestation: Facts, Causes & Effects. Live Science. Link
- Mikaela Weisse and Elizabeth Dow Goldman, October 23, 2017. Global Tree Cover Loss Rose 51 Percent in 2016. World Resource Institute. Link
- Philip G. Curtis, Christy M. Slay, Nancy L. Harris, Alexandra Tyukavina, Matthew C. Hansen. September 14, 2018. Classifying drivers of global forest loss. Science. Link
- Bob Silberg, June 29, 2016. Why a half-degree temperature rise is a big deal. NASA Global Climate Change. Link
- Luo, T., R. Young, and P. Reig. 2015. “Aqueduct projected water stress rankings.” Technical note. Washington, DC: World Resources Institute, August 215. Link
- Francisco Sánchez-Bayo, Kris A.G.Wyckhuys, April 2019. Worldwide decline of the entomofauna: A review of its drivers. Biological Conservation. Volume 232, Pages 8-27. Link
- P. Wester, A. Mishra, A. Mukherji, A. B. Shrestha (eds) (2019) The Hindu Kush Himalaya Assessment—Mountains, Climate Change, Sustainability and People, Springer Nature Switzerland AG, Cham. Link
- Global Warming’s Evil Twin: Ocean Acidification. The Climate Reality Project. June 2016. Link
- Groundswell – Preparing for Internal Climate Migration. World Bank. March 2019. Link
- Campiglio, Emanuele, Yannis Dafermos, Pierre Monnin, Josh Ryan-Collins, Guido Schotten, and Misa Tanaka. 2018. Climate Change Challenges for Central Banks and Financial Regulators. Nature Climate Change 8, pp. 462–8. Link
- Report on the structured expert dialogue on the 2013–2015 review. UN Framework Convention on Climate Change. June 2015. Link
- Adrian E. Raftery, Alec Zimmer, Dargan M. W. Frierson, Richard Startz, Peiran Liu. July 31, 2017. Less than 2 °C warming by 2100 unlikely. Nature. Link
- NASA Global Climate Change. Accessed on March 20, 2019. Link
- NASA Earth Observatory: Global Temperatures. Accessed on March 20, 2019. Link