Extreme weather could cause a major economic recession around the globe, but we are still underestimating those risks, new research warns.
“If the market doesn’t do a better job of accounting for climate, we could have a recession, the likes of which we’ve never seen before,” said Paul Griffin, an accounting professor at the UC Davis Graduate School of Management, who authored “Energy Finance Must Account for Extreme Weather Risk.”
In a paper, published in the Nature Energy journal, he noted that the financial markets fail to link physical climate risk to company market valuations. One of the key messages of the report is that there is high “unpriced risk” in the energy market, which is exactly what caused 2008’s Great Recession.
“Right now, energy companies shoulder much of that risk. The market needs to better assess risk, and factor a risk of extreme weather into securities prices,” he explained.
Excessively-high temperatures seen in Europe and the US last summer, for example, are harmful not only for human health, but also “stunt economic growth” by causing problems such as fires which can severely affect supply chains, including energy and water delivery. Thus, natural disasters pose a threat to businesses and can eventually disrupt the entire economic system.
Another problem is that some key facilities, like oil refineries on the US Gulf Coast, could be exposed to storms or flooding, while energy companies located in arid areas could be hit by wildfires, the author of the study notes.
“While proprietary climate risk models may help some firms and organizations better understand future conditions attributable to climate change, extreme weather risk is still highly problematic from a risk estimation standpoint,” he writes.
Another study, released by the World Wildlife Fund (WWF) earlier this month, warned that global economic growth will be affected by the loss of nature. The authors concluded that if the world carries on “business as usual,” reduced supply of several ecosystem services would lead to a drop of 0.67 percent in annual global GDP by 2050 and cost the world around $10 trillion. The US, which has repeatedly refused to address climate issues since Donald Trump took office, would suffer the largest losses of annual GDP in absolute terms, losing $83 billion each year by 2050, according to the WWF report.