Climate change and investments
Image © Ana Skobe, Environment & Me/EEA
Climate change will affect us in a variety of ways, whether through increased air pollution, acidification of oceans, or flooded homes and fields. Some damage costs, such as economic loss due to damaged property from floods, are relatively easy to quantify in monetary terms. But other costs are more difficult to estimate. Can we put an accurate price tag on potential ill health or future reductions in crop productivity due to climate change?
Despite such difficulties and the uncertainties linked to climate change, the Intergovernmental Panel on Climate Change (IPCC) estimates the likely economic loss caused by just 2°C of global warming to be between 0.2-2% of global gross domestic product (GDP), even if strong adaptation measures are taken. Once warming proceeds beyond this, the costs would rise further.
Although we may not know the exact amount, costs from climate change are real and we are already paying for them in many ways, such as damaged property, medical expenses, and reduced crop yields.
In order to prevent or minimise some of the future costs to our society, economy, and environment, we need to take action. This raises the following questions: how much do we need to invest and in what areas?
Investing in infrastructure
Worldwide, we are consuming increasingly more resources. We need more food, land, and water to feed a growing global population, and we need more energy to heat homes and to fuel our cars. Our increasing levels of consumption are being met by unsustainable production patterns, which deplete non-renewable resources. This also results in more pollutants being released to the atmosphere, water bodies, and land.
The efforts to tackle climate change should be seen in the context of a broader transition to a ‘green economy’ — a sustainable way of life that allows us to live well, while keeping our resource use within the sustainable limits of our planet. The European Union’s 7th Environment Action Programme identifies ‘investments’ as one of the key pillars enabling this transition.
Investments are critical in tackling climate change because the investment choices made today have long-term implications — both positive and negative — for how basic societal needs are met in the future. One of the key ways that investments can help to tackle climate change is through infrastructure. Our societies build infrastructure to meet basic societal needs such as water, energy and mobility. This infrastructure is often very costly and is used for decades. It is therefore crucial in shaping the way we live. Some investment decisions might provide real opportunities to transform the way we meet these needs, while others risk locking us into unsustainable practices for decades.
The International Monetary Fund (IMF) has estimated that the world spends approximately EUR 4.8 trillion (USD 5.3 trillion) a year on energy subsidies, mainly on fossil fuels. The IMF’s definition of ‘subsidies’ in the context of its recent report covers the unpaid costs of all the environmental damage caused by fossil fuels. In the same report, the IMF estimates direct subsidies (i.e. government policies underwriting oil, gas, and coal production or consumption) to amount to approximately EUR 460 billion globally (USD 500 billion). Such subsidies might result in unintended outcomes, where long-term investment decisions concerning our energy infrastructure continue to favour fossil fuels.
Decarbonising the energy and transport systems?
Combustion of fossil fuels is one of the key contributors to greenhouse-gas emissions released into the atmosphere. Fossil fuels are also one of the key components of the global energy system, meeting our need for energy in our homes, offices, factories, and cars.
A total shift from fossil fuels to sustainable renewable alternatives is not easy. It requires changes in the entire energy system from production and storage to distribution and final consumption. For example, the electricity produced by solar panels should be made available for use at a later date in another location, and possibly another country. This can only be achieved if well-connected smart grids are in place. Other systems such as the transport system will also need radical change. This will involve replacing the current fleet with electric vehicles, and creating new public transport networks that can address the demand for mobility by offering alternatives to driving in private cars. When taken altogether, the investment needs to bring about these changes could be massive.
According to European Commission estimates, making the EU’s energy and transport systems ‘low carbon’ will require around EUR 270 billion of additional public and private investment per year for the next 40 years. This additional amount corresponds to around 1.5% of EU GDP — similar to the IPCC’s climate change economic loss estimate of 0.2-2% of global GDP by 2050. So will investors act now to minimise future impacts?
Re-directing existing expenditure
Governments, businesses, and citizens are already spending money on building transport networks, power generation, housing, and consumption goods and services in the EU. Although it varies among the Member States, government spending in the EU is close to around 50% of GDP. A part of this consists of investment expenditure (technically ‘gross capital formation’) on areas such as large infrastructure projects, research, health services, etc. The same is true for household or business expenditure.
So what kind of energy and mobility system we are going to build for the future? Are we going to lock our money into unsustainable solutions or are we going to create the space in which sustainable alternatives can grow and transform the way we meet our needs? Public funding can play an instrumental role here by providing incentives and sending ‘green’ signals to the market. For example, the decision to shift public funds from fossil fuels towards renewable energy generation would send a clear signal not only to energy producers, but also to researchers and energy users.
In line with its Europe 2020 Strategy, the EU allocates nearly EUR 1 trillion for sustainable growth, jobs, and competitiveness in its multiannual budget for 2014-2020. At least 20% of this multiannual budget will be spent on transforming Europe into a low-carbon and climate-resilient economy. To achieve this goal, climate objectives have been included in relevant EU policies and programmes such as structural funds, research, agriculture, maritime policy, fisheries, and the LIFE programme on nature conservation and climate action.
These funds are complemented by public expenditure at national, regional, and local levels in the EU Member States, as well as by private sector investments (e.g. businesses, pension schemes, households). There are also global funding channels, such as the Green Climate Fund set up under the UNFCCC (United Nations Framework Convention on Climate Change), aimed at helping developing countries to adapt to climate change impacts and to adopt mitigation measures.
The opportunity ahead
We know that we need to invest to meet growing demand in some areas. According to the New Climate Economy report, global energy use is projected to grow by between 20% and 35% in the next 15 years. To meet this demand, more than EUR 41 trillion will be required between 2015 and 2030 for key categories of energy infrastructure. Given that energy production and use already account for two-thirds of global greenhouse-gas emissions, the type of energy sources we invest today will largely determine whether we will succeed in limiting global warming to 2°C or not.
Some sectors and communities will undoubtedly be affected by this shift and re-channelling of funds towards sustainable alternatives. Governments will need to use social policies to support those affected by this transition. Governments and public authorities will also need to adjust to changing realities. For example, a total divestment from fossil fuels would also imply reduced tax revenues and royalties from these sectors. It would also imply downsizing in the affected sectors and likely job losses.
In some ways, change is already underway. Despite the economic crisis that affected the European economy from 2008 onwards, eco-industries (e.g. renewable energy, wastewater treatment, and recycling) in the European Union continue to grow. Between 2000 and 2012, eco-industries grew by more than 50% in terms of value added and by almost 1.4 million additional jobs to reach a workforce of 4.3 million, while the rest of the economy showed otherwise relatively flat growth and stagnant employment rates in this period. This boom in eco-industry jobs could equally be seen as part of an evolving and competitive workforce, with fewer people working in unsustainable sectors (e.g. coal extraction).
With higher awareness levels, some communities and businesses are also deliberately divesting or opting out of unsustainable solutions in favour of supporting niche innovations. Investing in environmental innovation and research would not only help the EU to adopt cleaner technologies and build a sustainable future, it would also boost the EU’s economy and competitiveness. Europe can reap the benefits of being a global leader in eco-industries by exporting its technology and know-how to help meet the anticipated growth in global demand in energy, mobility, and housing.
It is true that a transition to a green economy will take time. But the earlier we act, the lower will be the costs and the greater will be the benefits.
For references, please go to www.eea.europa.eu/soer or scan the QR code.
PDF generated on 28 Sep 2016, 01:07 PM