Week 48: Demographic Dynamics and Climate Challenges

Dear all,

COP what? COP this and COP that. COP zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz. And zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz zzz.

I will not spend more time on COP. COP does not have place in this newsletter. ?I wrote about it about month ago and we all know the outcome already. You can find that newsletter here .

As for all of you who expect anything else from COP more than what climate envoy Kerry already said 2 months ago, please send me a note.

This topic is as sensitive as it is jolly important, and it will have significant implication on the European investment context as well as at the economy at large. Climate change and demographic change are two megatrends that are often discussed without regard for their complex interactions.

Demography plays a pivotal role, getting influenced by and influencing economic, social, political, and environmental changes. The way populations shift has become a mega-trend shaping both global and local developments.

Looking ahead to 2035, we can expect one out of four people in Europe to be aged 65 or older, a significant jump from one in thirteen back in 1950. The demographic challenge in Europe is like a ticking time bomb, as the EU Commission warns that the aging population and declining birth rates will hit a peak around 2026.

The working-age population is anticipated to drop by a whopping 57.4 million by the end of the century. This is likely to worsen labor shortages and put more strain on public budgets.

Analyzing the numbers reveals the 'graying' of Europe—a shift characterized by lower birth rates, reduced mortality, and longer life expectancy. This reshapes the population pyramid, leading to an older demographic structure with fewer working-age individuals and a growing number of retirees.

The elderly population is expected to surge in the coming decades, especially with the post-war baby-boom generation entering retirement. This puts a significant burden on the working-age population as they need to support the increasing number of retirees.

The World Health Organization (WHO) warns that by 2024, those aged 65 and above will outnumber those under 15, bringing forth new social, economic, and health challenges.

While the global population is aging overall, Europe, especially in the southern and eastern regions, stands out, facing record-low fertility rates and high emigration.

The aging population poses serious concerns for public finances and economic growth. IMF economist Philipp Engler predicts a shrink in gross domestic product per capita in advanced economies, with substantial reductions expected in the EU.

Demographic expert Martina Lizarazo López estimates that by 2050, demographic changes could decrease average per capita income in France, Spain, Italy, and Germany by €4,759-€6,548 at 2010 prices.

The European Commission forecasts a 2.3 percentage point increase in spending on healthcare for older people and pensions by 2040, already accounting for 25 percent of the EU's GDP.

A WHO report reveals that 40 percent of medical doctors in one-third of European and Central Asian countries are nearing retirement. In Eastern Europe, emigration, particularly of prime-aged individuals, further complicates the situation. Over the past two decades, Romania saw 3.4 million more people leaving than moving in, with similar migration patterns in Estonia, Latvia, Lithuania, Croatia, Serbia, and Bulgaria.

In regions grappling with these demographic challenges, maintaining growth and social support necessitates a delicate balance between increasing the workforce and improving productivity. This, as noted by IMF economist Alasdair Scott , is no easy feat.

On November 15, 2022, the global population hit a significant milestone – 8 billion people. This event triggered discussions about the implications of population growth on environmental sustainability, the Earth's carrying capacity, and climate change.

As population growth slows down and the peak approaches, the global population's trajectory now resembles the "S" shape of a logistic function rather than the indefinite exponential growth envisioned by neo-Malthusians in the 1970s.

Transitioning from exponential to logistic growth doesn't diminish the relevance of population to climate change. Growth rates are applied to a much larger population, and a 1% growth rate in 2022 means adding ten new cities, almost the size of New York, within a year. The ongoing expansion until at least 2060 raises concerns about its consequences for global climate mitigation and adaptation efforts.

Recognizing that we're entering an era of stabilized population growth and eventual decline adds a new dimension to the discussion about demography's role in climate change. This becomes particularly important when juxtaposed with trajectories of energy consumption and economic growth still driven by expectations of exponential growth.

Considering differences in trends across world regions and demographic characteristics, alongside total population size and growth, is crucial. However, emission reductions necessary for climate change mitigation primarily hinge on major emitters like the EU, whose populations are either growing slowly or stabilizing, yet exhibit higher per capita emissions.

With economic growth on the horizon, the focus shifts to greening technology to disconnect human activity from fossil fuel combustion.

The IPCC explicitly recognizes the population's role, noting in the latest AR6 Synthesis Report that GDP per capita and population growth are major drivers of CO2 emissions. While population is frequently mentioned in the context of climate change's impact on populations, the focus often lies on adaptation gaps and the varying vulnerabilities of different demographic, socioeconomic, and geographical groups.

The IEA's 2022 Energy Outlook delves into detailed modeling of energy supply and demand under different scenarios but treats population as an external input with limited consideration of interactions with GDP, energy, and demographic components.

Moreover, Integrated Assessment Models (IAM) and energy models usually address total population, neglecting emissions influences from specific demographic dimensions such as age, education, rural-urban residence, and household size and composition.

A foresight exercise conducted by DG ENV under the EU foresight system (FORENV) raises questions about the explicit role of demographic characteristics on climate change. The exercise identifies emerging environmental issues in the EU linked to demographic changes, emphasizing three issues as potential drivers for environmental impacts.

• How might Europe’s ageing population influence political preferences for the green transition?
• What will be the environmental impact of changes in the demographic makeup of urban areas?
• As Europe’s population ages, will consumption patterns change and what will this mean for the environment?

Europe faces demographic challenges on multiple fronts :

1. Population size: Europe anticipates a decline or stabilization in its population, contingent on migration scenarios. However, unlike Europe, many other regions are poised for continued growth. This discrepancy threatens to diminish Europe's relative weight in global population terms, jeopardizing its influence in world affairs and global governance institutions.
2. Economic implications: The European workforce is on the brink of a rapid decline, posing a potential obstacle to Europe's ambitious economic objectives. The impending reduction in the working-age population raises concerns about the region's ability to achieve its economic goals.
3. Europe’s social contract: the unprecedented rise of an elderly population combined with shrinking numbers of working-age natives alters the generational contract and will put Europe’s welfare systems at risk.

To curb negative population trends, Europe can have recourse to various strategies, each of them having though only a partial potential impact on the above challenges:

1. Geographic enlargement: including new countries in the EU brings at once additional populations to the Union;
2. Pro-natalist policies: if successful, they would foster a higher birth rate which translates 20 years later into a corresponding increase in the working-age population;
3. Immigration policies: calling in immigrants would affect both the size and the structure of the population;
4. Policies on retirement: Modifying the age limit differentiating economic activity from retirement offers a strategic approach to tackle challenges arising from demographic shifts, without directly altering the demographic figures;
5. Other policies, notably those on education and labour, can also contribute to addressing, albeit indirectly, some of the problems generated by a decreasing workforce.

Most public and scientific discussions of what to do about climate change include, as they should, concern about population dynamics. Shifts in population trends do indeed have multiple implications in the climate change context.

However, their nature and actual impact are often misunderstood or oversimplified, a fact which tends to have population dynamics ignored both in intergovernmental climate change negotiations, as well as in the practice of adaptation to climate change.

Adaptation to climate change is urgent. It is something that we must engage in immediately, or risk disaster. Adaptation is also not just about acting, particularly when we do so reactively. It is about planning, about development and about preparing for the world as it will be, not just as it is.

Adaptation is about more than infrastructure and ecosystems. It is about people, their characteristics and resources, and how they come together in communities and countries.? It is more important than ever that we understand how people, not just places, are vulnerable to climate change, and how they are and can become more resilient.

So, the question is when will we have “Demographic impact funds or European Large Cap Demographic focus ETF’s”? We need them, and we need them fast.

Have a great Demographic week!

All the best,

Sasja