Will a $38 Trillion Loss Prompt us to Act Faster on Climate?

Intense flooding in Dubai last week and a new study reveal the economic costs of climate change. Climate change is expected to cause massive economic damages over the coming years. We have a choice of containing this cost or allowing it to skyrocket.

Dubai Flooding

Last week’s flooding in Dubai – in which over a year’s worth of rain fell in a single day – has been closely connected to climate change. Climate change triggers weather extremes and disrupts typical weather patterns. One big change currently happening is the atmosphere is getting warmer. A warmer atmosphere can hold more water, which in turn leads to heavier rainfall (when it does rain). This process makes extreme rainfall events more likely. It also changes the pattern of when rain usually falls. The worse climate change gets, the greater these impacts will be.

Economic Damage

The images from Dubai’s flooding provide an alarming visual of the economic impacts of extreme rainfall and flooding, especially on a city’s infrastructure and transportation network. A wealthy international city known for its tourism attractions and impressive infrastructure came to a halt. Runways at Dubai’s airport – one of the busiest in the world – went underwater and its operations were temporarily suspended. Streets were submerged and buildings flooded. One initial estimate put the damage at $1 billion.

These scenes highlight how cities without comprehensive infrastructure in place to withstand weather extremes (in this case an effective stormwater management system) face much greater risk from the impacts of climate change.

1.3°C Temperature Rise

Unfortunately, the type of flooding in Dubai is just a taste of what’s to come worldwide. Over the past 200 years, we have burnt huge quantities of fossil fuel which has released enormous amounts of heat trapping gasses (e.g. CO2) into the atmosphere. As a result, the global average temperature has now risen by at least 1.1°C above pre-industrial temperature levels. Some estimates already put this temperature rise at 1.3°C. This seemingly small rise is already enough to increase the intensity and frequency of heatwaves, droughts, floods, and tropical storms, in addition to raising sea levels caused by the melting polar ice caps.

In order to respond to this new climate reality, all countries around the world will need to prepare for these impacts and work as hard as possible to prevent any further climate change.

The 1.5°C Target and 2°C Target

So far, the collective action of governments around the world has not been enough to address the problem. The Paris Agreement, which virtually all countries around the world agreed to in 2015, set a target of limiting global warming to well below 2°C above pre-industrial levels and ideally to only 1.5°C. Almost 10 years on, it now seems we are highly likely to miss the 1.5?C target, with no credible pathway currently in place to achieve it.

20% Global Economic Loss Unavoidable

What might now make us respond most effectively to climate change are warnings about the economic losses that climate change causes. New projections of global economic losses are startling. A study released last week by researchers from Germany’s PIK - Potsdam Institute for Climate Impact Research estimates that the impacts of climate change will cost us, at minimum, one fifth (19%) of global income by 2050. That is the equivalent of $38 trillion in economic losses per year by 2050 (out of an expected GDP of approx. $200 trillion).

In essence, the global economy in 2050 will be 19% smaller than it could have been without climate change. Changes in climate have harmful impacts on agricultural yields, the physical infrastructure of our cities, and the ability of people to work, all of which can cause economic losses. For perspective, $38 trillion is larger than the current size of the entire US economy and is equivalent to two times the size of the European Union’s economy.

The study argues this is the minimum amount of economic loss we can now expect because of changes we have already made to the world’s climate system. The researchers said the economic losses will be caused by climate impacts from both the CO2 humans have already put into the atmosphere since the Industrial Revolution and the future CO2 that will be emitted under a low-emissions scenario aimed at limiting global temperature rise to less than 2°C.

On Track for Nearly 3C Warming

Today, CO2 continues to be emitted into the atmosphere year by year but the hope is that the most ambitious pathway possible – a low-emissions scenario – will be pursued by all governments, in which we rapidly draw down emissions and keep global temperature rise well below 2°C.

Currently, however, we are not on track for staying under 2°C of warming. According to Climate Action Tracker , current policies in place around the world are projected to result in around 2.7°C (2.5C-2.9C) of warming by the end of this century. Governments have promised to take more ambitious steps but there is currently a substantial gap between these promises and the actions they have undertaken to date.

A Choice Between 20% Loss or 60% Loss

The idea that the global economy is already committed to a 20% income loss – at minimum – is extremely alarming. However, these findings are not a cause for giving up, but rather a call for rapidly stepping on the climate action accelerator. The new PIK study found that if new emissions are not reduced drastically and immediately in order to limit warming to 2°C, economic losses will become even larger and could amount to up to 60% of global income by 2100. Limiting warming to 2°C however means the financial hit stays at around 20%.

Think of it this way: If your house is in the process of burning down and you have a choice of losing one room or the whole house, the rational choice would be to work as hard as possible to contain the fire to one room and limit any further damage. (And in this scenario there is no home insurance giving you the option to rebuild your house if it completely burns down – there is no planet B).

Spend Now to Prevent Further Damages

One of the central messages of the new study is that the cost of preventing further climate change is far less than the cost of dealing with the damage it will cause. Various estimates exist of how much it would cost to prevent further climate change. The International Monetary Fund estimates that to limit global warming to 1.5°C, we will need to increase annual green investments to around $5 trillion per year by 2030. This would equate to roughly 3-4% of projected global income (global GDP) that year.

Spend Now to Reduce Damage from Inevitable Climate Impacts

We will also need to adapt to the changes in climate that we are now already locked into. We may be able to reduce some of the $38 trillion expected in damages if we do so. This will involve adapting to rising temperatures, changes in rainfall, and extreme weather, among other impacts.

Two Tracks

These two tracks will need to be pursued in parallel, with equal vigour. On the one hand, we will need far greater adaptation efforts to be able to withstand the impacts that are being caused (and going to be caused) by the CO2 we have already put into the atmosphere. On the other hand, any future CO2 emissions (i.e. starting from today) need to be cut as quickly as possible to avoid even greater climate impacts.

An Overestimate…?

There is an inherent uncertainty in forecasting the future. Previous studies have projected much lower economic losses compared to the new PIK study. Additionally, the UN’s climate science body, the IPCC , has acknowledged a high level of uncertainty and disagreement among researchers in assessing the potential economic impacts of climate change. This is due to the complexity of accurately modelling economic losses and accounting for climate impacts that are difficult to quantify in economic terms. By nature however, IPCC findings tend to be conservative. The body has acknowledged though that economic damages are projected to be higher the warmer the planet gets.

There are some economists who argue that the projections in previous studies have grossly underestimated potential economic losses. These voices also emphasise the importance of adopting the ‘precautionary principle’ or a ‘guardrail approach’ or a ‘risk of ruin’ approach (used by the insurance industry) in which we rule out possible future risks of catastrophe by paying a moderate price now (i.e. reducing emissions). This was the ethos that underpinned the 2015 Paris Agreement and setting of the 2°C warming limit.

In contrast to previous studies, the PIK researchers say their much higher projections of economic loss are based on the availability of more detailed data and the inclusion of more climate variables. The study examined economic damages at the sub-national level (in 1,600 regions around the world), rather than just the national-level, and accounted for a greater number of climate variables beyond just changes in annual temperature.

…or an Underestimate?

Acknowledging uncertainty, the PIK researchers say their study is in fact likely to be an underestimate of the full economic costs that will be felt by 2050. While accounting for some of the main climate impacts (rising temperatures, seasonal temperature variability, and changes in rainfall), the researchers did not comprehensively account for all impacts in their projections. This is due to uncertainty about how these changes will affect the economy. Notably they did not account for the economic losses that would be brought about by heatwaves, sea-level rise, tropical cyclones, wildfires, large-scale ice sheet destabilisation, impacts on human health and species and biodiversity loss. They say accounting for all of these factors would likely raise the projected loss.

Echoing the 2006 Stern Report

The PIK study echoes the findings of a groundbreaking report produced for the UK government in 2006. This was produced by economist Nicholas Stern and came to be known as the Stern Review. It estimated that the annual costs of curbing global temperature rise (e.g. transitioning to a clean energy system and away from fossil fuels) would be around 1% of global GDP per year up to 2050. However the cost of taking no action would be equivalent to losing at least 5% (and perhaps as high as 20%) of global GDP every year for the foreseeable future. It similarly posed a choice of pay a lower cost now or pay a higher price later.

Higher Losses for Gulf States

Focusing back on Dubai, the city sits within a region that is particularly vulnerable to changes in climate. The PIK study estimates economic losses will be higher across the Arabian Peninsula compared to the global average. It projects income losses of 25-30% or more for this region by 2050, finding that damages are larger in regions where temperatures are already higher and economic vulnerability to rising temperatures is greater.

50% More Warming in the Arabian Peninsula

Over the past five decades, the climate has been changing faster across the Arabian Peninsula compared to other regions. A 2023 report by AEON Collective , KAPSARC and KAUST (King Abdullah University of Science and Technology) , highlighted that the Arabian Peninsula has been warming 50% faster than other landmasses in the northern hemisphere.

The report, which looks at the likely impacts of 3°C of global temperature rise on Saudi Arabia, describes how the region is expected to experience an increase in heat waves, dust storms and periods of high humidity. Rainfall and flash flooding (when it occurs) is also expected to become more intense, all of which threaten to cause significant economic losses. The cost of inaction would be alarmingly high. As such, the message is the same: we have a choice of containing the impacts of climate change or allowing them to skyrocket.

Risk to Saudi Mega Projects

This dilemma is especially pertinent for Saudi Arabia’s new giga and mega projects aimed at diversifying the country’s economy. The country has announced around $1 trillion worth of new infrastructure projects as part of its nationwide transformation initiative, Vision 2030. Higher temperatures and more frequent extreme weather events will bring greater physical stresses to this infrastructure and impact its functionality and ultimately its useability. The new projects under development, such as NEOM and Riyadh’s mega projects, will need to take this into account, especially in the planning stage, in order to future-proof their infrastructure.

Money Motivates?

The rational case for urgently addressing climate change is clear. Arguably, the moral case for acting is also strong. As one writer put it: “The moral imperative for the remainder of the lives of everyone now living is to decarbonise as fast as possible.” Yet under our current global economic model, morality is unlikely to make us act.

The economic fallout from climate change may be what is most likely to galvanise all governments and all businesses into much greater action in addressing climate change. This will mean investing immense amounts of money into adaptation and mitigation. We need to adapt to the impacts caused by the CO2 we have already put into the atmosphere and to mitigate any further climate change as much as possible. Doing so will save us a whole lot of money.

About The Author:

Charles Phillips collaborates with a range of companies as an independent consultant on sustainable development projects in Saudi Arabia. Currently, he is teaming up with ModeScore to support Riyadh’s mega projects with sustainable mobility planning. ModeScore is a London-based firm that advises and certifies buildings, real estate developments, mega projects and cities for their sustainable transport infrastructure. ModeScore’s sister initiative is ActiveScore which assesses buildings for their active travel services, such as walking and cycling. Charles also partners with Opinno , a Madrid-based innovation firm, to support Saudi organisations in leveraging innovation for their transition to net zero emissions. See more here: www.charlesphillips.co