The Risky Business Project Report: a Business Perspective on Global Warming

Summary.  The Risky Business Project, headed by the prominent businessmen Michael Bloomberg, Henry Paulson, Jr., and Thomas Steyer, working with a multidisciplinary team of experts, recently issued the report “RISKY BUSINESS: The Economic Risks of Climate Change in the United States”.  The report describes historical patterns of changes brought about by global warming in the U. S., and projects future changes up to the year 2100 based on risk analysis as used in the business world.

The report projects that, especially if emission of greenhouse gases continues unchecked, the harms brought about by intensified global warming will have significant negative effects on U. S. socioeconomic development.  This includes agricultural yields, labor productivity, human health and mortality, incidence of violent crime, energy demand, and coastal infrastructure affected by sea level rise.

Risky Business advocates addressing global warming using the tools of risk analysis common among corporate and financial leaders.  This approach will lead to pathways easing the future effects of global warming by identifying investments in mitigation measures and adaptation strategies.

 

Introduction.  Several important reports documenting the worsening of global warming in recent decades and projecting significant further increases have been issued in the past few months.  Examples include the Fifth Assessment Report (5AR) of the United Nations-sponsored Intergovernmental Panel on Climate Change (IPCC) and the U. S. government’s National Climate Assessment (NCA).  The last of the three sections of 5AR appeared in April 2014, and the NCA was issued in June 2014.

The Risky Business Project issued its report, “RISKY BUSINESS: The Economic Risks of Climate Change in the United States” (RB) on June 24, 2014.  The principal authors of this report are drawn from the financial and business world, and represent both Republican (R; U. S. conservative political party) and Democratic (D; U. S. liberal political party) points of view.  They are Michael R. Bloomberg (R), founder, Bloomberg Philanthropies; former Mayor of the City of New York, and founder, Bloomberg L.P.; Henry M. Paulson, Jr. (R), Chairman of the Paulson Institute, former U.S. Secretary of the Treasury and former CEO of Goldman Sachs; and Thomas F. Steyer (D), retired founder, Farallon Capital Management LLC.  They oversaw a bipartisan group of seven former U. S. legislators and cabinet members, a former academic and a corporate executive (the Risk Committee) in preparing the document.  RB in turn is based on a more detailed technical report issued by the Rhodium Group, a consulting firm, entitled “American Climate Prospectus, Economic Risks in the United States” (ACP) and written by a group of twelve experts from the Rhodium Group, Risk Management Solutions, Inc., and academic scientists.  As was the case for earlier reports, the RB draft was reviewed by outside experts, whose comments were taken into account in preparing the final version.

The Significance of RB lies in the fact that it was prepared by business and financial executives, with the assistance of former federal government policymakers.  Earlier reports have stressed the scientific basis for documenting past global warming and projecting scenarios for future changes, and have sought to mobilize public opinion and policymakers by force of scientific and technical findings.  RB, on the other hand, and NCA in part as well, adopt a business-driven, risk-oriented analysis of global warming and its effects on the United States, providing the public and our elected policymakers with practical, economic reasons for addressing the effects of global warming.

Projected Risks from Global Warming in the U. S.  RB defines risk as “the

probability (or likelihood) of an event combined with the severity of its consequences”.  High risk requires significant contributions from both factors.  Assessment and management of risk is an integral part of business management.

Modeling of future climatic and economic impacts of further global warming was done using the same suite of models as was employed in earlier reports, including AR5 and NCA (see Details at end of this post).  Modeling of future temperature trends has been presented to the public many times already (e.g. in AR5 and NCA), and will not be repeated here, even though they are summarized verbally and graphically in RB.  Rather this post focuses on economic, health-related and social impacts arising from these projections.

Risks arising from global warming can be diagrammed as a shift in the likelihood of an event occurring, such as to the “right” in the graphic below.

 

A general representation of how global warming shifts the likelihood of the occurrence of climate events (such as global average temperature, extreme precipitation, or drought occurrence).  A shift in the occurrence of an event is shown, and assumes that the rightward shift to the “new normal” is damaging or harmful.  In the new normal the likelihood of occurrence of red-shaded extreme events increases, compared to their likelihood under “normal” conditions, whereas the likelihood of occurrence of blue-shaded extreme events is reduced.

Source: Risky Business;  http://riskybusiness.org/uploads/files/RiskyBusiness_PrintedReport_FINAL_WEB_OPTIMIZED.pdf .

 

Severe economic consequences with significant effects on national economic activity are projected in RB, using the emissions scenario in which no significant effort is made to reduce the rate of emissions of GHGs (RCP 8.5, see Details below). 

The sea level will continue rising unabated in this scenario.  By 2050 US$66-US$106 billion worth of coastal property present today will likely be below sea level nationwide, increasing to US$238-US$507 billion worth of property below sea level by 2100.  Gentle coastlines are more susceptible to loss than steep ones, and the Southeast and Gulf Coast regions may be most affected.  Northeast coasts and cities are also at high risk, with sea levels risking rising by 2-4 feet by 2100.

Storm surges are made worse with rising sea levels.  This factor risks being significant in the Southeast.

Extreme heat will significantly impact the central regions of the country: the Southwest, the Southeast, and the Upper Midwest. 

Averaged over the nation as a whole, it is projected that there will be 27-50 days over 95ºF by mid-century, more than three times the average for the past 30 years; by 2100 this number could be 45-96 days.  These extremes are expected to be much more severe in the Southwest, the Southeast, and the Upper Midwest.

Extreme heat will lower productivity of workers who have to be outdoors, by about 3%.  When the temperature and humidity combine to exceed healthy levels, outdoor workers and those confined without cooling will be at risk of increased mortality.

The worst impacts of a hotter climate will be felt disproportionately among the poor, who frequently work outdoors and cannot afford air conditioning in their homes.

Agricultural output, especially in the Southeast, lower Great Plains, and Midwest, will be impacted.

By 2100 crop yields in these regions could fall 50-70% for corn, soy, cotton, and wheat in the absence of agricultural adaptation measures.  Further north, yields could increase slightly in part due to the higher concentration of carbon dioxide in the air acting as a growth fertilizer. 

Individual farmers will be impacted because they will likely need to switch crops to grow, entailing investments in new know-how and equipment.

Demand for energy is projected to increase.  

The need for extra electric energy to run air conditioning may not be adequately met; addition of new generating capacity will be needed.  RB estimates that to meet peak demand up to 95 GW of generating capacity has to be built over the next 25 years, roughly the equivalent of 200 new fossil fuel plants.  New energy needs risk adding US$8.5-30 billion to the nation’s energy bill by mid-century.

Harvesting forest products is an important industry in the Northwest.

Global warming risks damaging lumber stock.  Worsening drought increases the incidence of forest wildfires and enhances forest destruction by insect pests which will be able to survive the warmer winters better than presently.

RB encourages business leaders to take an active role in addressing global warming and its harms.  As detailed above and in other findings in the report, various sectors of the economy, and differing regions of the country, will be economically impacted over the long time frame extending to the end of this century.  Robert E. Rubin, former Secretary of the Treasury and member of the Risk Committee states

“we have to begin by recognizing the reality and severity of [global warming] to our economies, both United States and globally, and really to life on earth more broadly as we know it. ….[T]his problem needs to be dealt with now. We cannot wait because greenhouse gases, once [emitted], remain [in the atmosphere] for centuries so that” the accumulated total of atmospheric greenhouse gases increases each year. 

RB recommends using the assessment that global warming risks serious harm to economic progress as a reason for undertaking steps to manage that risk.  It urges corporate leaders and investors to extend strategic time frames from the short term to the long term in order to counter expected damages.  The failure to invest in managing risk that might have been made 10-20 years ago has its consequences in the warming the world is currently experiencing.  Risk management going forward likewise must be undertaken with comparably long strategic time lines.  In particular, RB finds it is distinctly the role of business leaders to support establishing national policies at the federal level because, to date, there has been insufficient

“federal government support, resulting in a virtual ‘unfunded mandate by omission’ to deal with climate at the local level. [The authors] believe that American businesses should play an active role in helping the public sector determine how best to react to the risks and costs posed by climate change, and how to set the rules that move the country forward in a new, more sustainable direction.”

ACP projects effects of mitigation on several socioeconomic sectors, and discusses adaptation in some hypothetical situations.  Importantly, it points out that, since the earth climate system has an extended thermal inertia built in, warming that was under way as long as perhaps 15 or more years ago still affects today’s regional climates.  Similarly, any changes in global warming arising from mitigation of emissions begun “now” will not produce significant results for at least one or two decades.  For this reason ACP emphasizes the projected effects of mitigation for the last two decades of this century.  In the sectors of agricultural yield, labor productivity, health (as reflected in mortality rates), violent crime rates and energy expenditures, the worst effects are found with the “business-as-usual” (RCP 8.5) scenario, and the mildest consequences are projected for the most stringent mitigation (RCP 2.6) scenario.

Adaptation involves both changes in behavior and investment in infrastructure and buildings.  In ACP adaptation measures are merited to help reduce exposure to climate risks during the inertial period explained above in which mitigation has not yet shown its effects, i.e., in the near and medium term.  Individuals can reduce their exposure to high temperature, relocate to other, more benign, locales, and so on.  In agriculture, the choice of crop to cultivate can be changed, and crop research may produce more hardy strains.  Investment in flood and storm surge abatement can be undertaken.  Investment in more energy-efficient appliances and in upgrading housing and office building stock for greater efficiency are also important.

RB recommends action in three strategic areas while deliberately avoiding making recommendations to implement any specific policy.  First, business practices have to adapt to make economic institutions and infrastructure more resilient.  Such actions include, for example, altered patterns of agricultural production, or coastline reinforcements undertaken by local and regional governments because private insurance companies are retreating from covering these areas.  Second, investors and business managements have to incorporate risk assessment and management into capital investments and financial planning.  For example, the U. S. Securities and Exchange Commission recently issued Interpretive Guidance for voluntary disclosures of risks from climate change.  Third, the public sector, especially the federal government, must respond to mitigate future warming and to implement adaptation programs.  Various alternative policies can be implemented to further these objectives.  RB urges the “American business community to play an active role” in developing mitigation and preparedness strategies. 

Analysis

 

RB intentionally avoids making specific policy recommendations.  But Henry Paulson, one of its principal authors, published an op-ed in the New York Times on June 21, 2014.  In it, he advocates putting a price on carbon in order to promote the mitigation of emissions.  A price on carbon, he says, will build in price incentives to develop alternative energy sources, and promote reaching an agreement worldwide for the abatement of emissions.  Such an agreement requires the leadership of the U. S. and China, the world’s biggest emitters.

The IPCC’s 5AR, the U. S. government’s NCA and the present ACP with its summary RB are among many recent reports detailing historical global warming, its projected development in future decades, and its damaging socioeconomic effects.  The NCA and RB are written to stress the importance of risk assessment and risk management in humanity’s efforts to cope with global warming and its effects.  The RB is particularly significant because it was prepared not by climate scientists and academics from related fields, but by businesspersons and financiers; furthermore the RB addresses its evaluation directly to the audience of its peers in the corporate and business world.

Projections of global warming and its consequent harms are necessarily imprecise.  Climate models generate a large ensemble of individual simulations, which are then aggregated and analyzed in probabilistic terms.  Socioeconomic consequences of warming likewise are assessed by models that produce results couched in terms of probabilities.  For these reasons, our understanding of future trends is neither absolute nor certain.  In such situations it is appropriate to discuss the future in terms of risks, assessment of their potential harms and management of their consequences. 

These form the essence of a businessperson’s approach to managing a corporation or other large organization on the trajectory along its future path.  Businesspersons seek to minimize risk so that they can optimize growth and earnings in future years.  This motivation informs both their near-term, tactical, decisions as well as their long-term strategic choices.  RB urges businesspersons to incorporate climate risk assessment and management into their planning, especially in the long term. On longer time scales (e.g. toward the end of this century and beyond) benefits will accrue that will offset capital expenditures and reap socioeconomic rewards. 

Details 

Climate Models.  The world community of climate scientists has developed several global climate models seeking to project future behavior of the earth’s climate system.  These are now conventionally included in the Coupled Model Intercomparison Project Phase 5 (CMIP5) having an ensemble of 35 different models, which may differ in the way they characterize different aspects of the earth’s climate.  A subset of these, developed within the U. S., focuses on behavior in America, and permits analysis of trends by region within the country, as done in RB and NCA.  Trajectories emphasizing the atmospheric concentration of greenhouse gases are used for climate projections, identified by “RCP” numbers: RCP 2.6, RCP 4.5, RCP 6.0 and RCP 8.5.  The higher the RCP number, the more greenhouse gases accumulate in the atmosphere and the more intense warming will be across the face of the planet.  RCP 2.6 represents a trajectory with the most stringent limitation on future emission rates, while RCP 8.5 characterizes a trajectory with essentially no limitation on future emission rates (sometimes characterized as “business-as-usual”).

© 2014 Henry Auer