Risky Business: The Cost of Climate Change to the U.S. Economy

Editor's Note: Nik Steinberg contributed to this report.

In 2006, the British government released the world’s first and most comprehensive assessment of the economic impacts of climate change. The Stern Review on the Economics of Climate Change was instrumental in establishing unequivocally the link between physical impacts of climate change and economics. It helped dramatically shift the conversation on greenhouse gas mitigation.

Eight years later, the United States now has its own Stern Review.

Risky Business: The Economic Risks of Climate Change in the United States provides the most comprehensive assessment of the economic risks our nation faces from the changing climate. The report focuses on the clearest and most economically significant of these risks: Damage to coastal property and infrastructure from rising sea levels and increased storm surge, climate-driven changes in agricultural production and energy demand, and the impact of higher temperatures on labor productivity and public health.

Short-term costs in the billions

Let’s start with some of the short-term impacts; in climate-speak, short term is anytime between tomorrow and the next 15 years. The East Coast and the Gulf of Mexico will likely see an increase in the annual cost of coastal storms and hurricanes of $7.3 billion, bringing the total annual price tag to $35 billion on average. The agricultural sector in the Midwest and South may see decline in yields of more than 10 percent over the next 5 to 25 years if they don’t ‘adapt’ their crops and cultivation methods to the new climatic environment. Increases in temperature, heat waves and humidity will drive up demand for energy, calling for the equivalent of 200 new power plants across the country, which could cost up to $12 billion a year.

Long-term impacts significant threat to property and lives

As if this weren’t enough, the long-term projections present an even more dire outlook. In the Northeast, the projected costs of sea level rise are estimated at $9 billion in property loss each year, directly affecting 88 percent of the region’s population. In the Midwest, extreme heat is expected to last an additional two months by the end of the century, resulting in a 73 percent loss in crop yields. In the Southeast, extreme heat is expected to last an additional four months by the end of the century -- placing significant pressure on labor productivity, electricity costs and capacity -- and could lead to 11,000 to 36,000 additional deaths each year in the region.

The report also makes the important connection between financial capital and human capital, providing estimates on the changing patterns of labor productivity and human health as a result of climate change. To quantify the potential impacts on human health, the report utilizes the Humid Heat Stroke Index, or HHS, to measure the combined stress of heat and humidity on the human body. Findings show that in the Midwest HHS will reach dangerous levels at least two days in each year by the end of the century and by as much as 20 days each year by 2200, during which time it would be impossible to remain outdoors without putting one’s life at risk.

This chart from the report (right) offers a striking display of how average summer temperatures could increase if we don’t curb GHG emissions.

Similar if not more severe temperature predictions are reserved for the South and Southwest where labor productivity could drop by 3.2 percent in key sectors like mining, agriculture, construction, utilities, transportation and manufacturing. With a focus on average and extreme temperature increases, the report alludes to the challenges of switching from natural gas and oil-driven heating to electricity powered cooling.

With the exception of the Northwest, electricity demand and costs across the U.S. are expected to rise between 2 and 7 percent by mid-century. In somewhat uncertain terms, the report refers to greater pressure on the electrical grid system, along with local hospitals, banks and insurance companies.

Reducing emissions – and more

An immediate and obvious conclusion from the report is the need to ramp up our greenhouse gas (GHG) mitigation efforts. The report's authors administer a healthy dose of the precautionary principle, urging leaders in business, investment and the public sector to consider the potential material risks of climate change at the regional and national level. Acknowledging the urgency behind climate change and the ever-increasing rate of range, these sectors are urged to reallocate capital to strategic mitigation investments in the short-term.

In the absence of aggressive adaptation measures, the Intergovernmental Panel on Climate Change reports that the threshold for keeping planetary warming at a tolerable level could be as little as 15 years. The Risky Business report effectively conveys this message in business terms and presents the material risks of climate change by highlighting the severe impacts on the U.S. economy and our collective inability to ameliorate such risks in the near future.

Another important take-away is the need to start adapting to climate change – and fast! Even in the most optimistic scenario where the planet successfully contained GHG emissions, we are still bound to experience significant impacts from GHG already accumulated in the atmosphere. But while we have a pretty good sense of how to reduce our GHG emissions – the main hurdle is political, adaptation is a different story altogether.

Managing climate risks: What does it mean for businesses?

It’s one thing to be convinced we need to adapt, it’s another to understand and be able to quantify the many ways climate change may impact a business’s value chain. Climate change can impact businesses in their supply chain, their operations, their manufacturing or production processes, and their distribution network. It can affect the infrastructure businesses need to operate, shift consumer preferences or make products obsolete. The impacts of climate change can be gradual or abrupt, hit tomorrow or in 30 years.

Businesses may at times forget how they depend on ecosystem services, even if they’re not sectors directly dependent on natural resources like agriculture or mining. At the end of the day, businesses (and the humans that run them) all depend on food, fresh water, fiber, fuels, and other biochemical products that nature provides. Certainly, not all sectors are born equal from that standpoint – but the most sophisticated tech products still need water and energy to be manufactured, and minerals to be processed.

The chart at right, drawn from the Millennium Ecosystem Assessment Synthesis Report, illustrates the many ways ecosystems support human and economic activities.

And finally, not all companies are equipped to respond and rebound from this kind of disruptions. Any modern computers and servers and A/C and telecoms – all of which can be subject to disruption due to extreme weather events and costs increases over time. But some companies have business continuity plans and backup generators, and others may be put out of business by an extended power outage.

Taking action

These differences can be analyzed, measured, and addressed. At Four Twenty Seven, we’ve developed a methodology to quantify the relative sensitivity of businesses to climate change that captures both their reliance on natural systems (ecological dependencies) and their exposure to weather variability, both in their operations and in their supply chain. We also have tools to assess an organization’s ability to respond to predictable and unpredictable changes.

This diagram illustrates how ecological dependency can vary by sector, hence creating different climate risk profiles for different companies (Source: Four Twenty Seven, Inc.).

There’s no silver bullet to climate adaptation. But there are practical tools and steps a business can take to understand its exposure to risk, estimate potential costs and develop effective adaptation measures. The Risky Business provides an important economic context for the nation – now it’s time for businesses to start looking at climate risks in their own operations, and focus on building resilience.

Image credits: Risky Business

This post was originally published on the 427 blog.

Emilie Mazzacurati is Founder and CEO and Nik Steinberg is a Climate Risk Specialist with Four Twenty Seven, Inc., Four Twenty Seven provides innovative tools and services to organizations seeking to understand climate impacts, assess risks to their operations or their stakeholders, and increase their resilience by developing and implementing climate adaptation measures. Contact us for a free preliminary assessments.