Climate change – potential economic impacts

New Zealand Society for Risk ManagementClimate Change Seminar10 July 2007

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Outline

► Introduction to economic framework for exploring potential impacts

► Overview of potential economic impacts for New Zealand

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Risk management process

Risk assessment

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Yes

Establish the context

Identify risks

Analyse risks

Evaluate risks

Treat risks?

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Risk Management Process - overview Reproduced from AS/NZS 4360:2004 with the permission of Standards New Zealand

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Economic framework

► In risk management:– Consequence x likelihood = risk

► In economics:– Impact x probability = expected impact

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Economic framework

► Size of consequences/impacts depends on:– Magnitude of change– Rate of change– Variability and extreme events– Thresholds– Aggregate and cumulative risks– Mitigation and adaptation

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Economic framework

► What is the market failure:– Prices don’t reflect full costs, including environmental

costs such as the cost of greenhouse gas emissions– Causes high emissions activities (e.g. energy sources,

industrial processes) to be under-priced relative to activities producing fewer emissions

– Results in higher than optimal level of high emissions activities relative to low emissions activities

– Leads to higher than optimal level of emissions and degradation of the environment

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Economic framework

► Higher than optimal:– Where the costs of achieving a reduction in emissions

(including any forgone output) would be outweighed by the benefits secured (though improvement in environmental quality/avoidance of climate change impacts)

► Optimal:– Reduce emissions to the level where a further

reduction would add more to costs than it would add to benefits

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Economic framework

► Climate change:– Uncertain likelihood/probability – Uncertain consequences/impacts

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Economic framework

► Accommodating uncertainty:– Sensitivity analysis– Scenario modelling– Probability distribution– Decision rules – maximin payoff, minimax regret,

index of pessimism, real option value– Attitudes to risk – diffuse, insidious, delayed,

irreversible

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Climate changes

► Temperature► Rainfall► Wind► Sea level► Extreme events► Regional variations

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Economic impacts

► Stern Review:– Without mitigation, 5% to 20% of global annual GDP

► IPCC estimate: – Australia and New Zealand – 1.2% to 3.8% of GDP for

equivalent doubling of carbon dioxide concentrations– Low confidence – excluded many currently identified

effects and adaptations► Mitigation and adaptation:

– Could slow economic growth slightly in short run– Could have immediate benefits in reducing impacts of

current climate variability and extreme weather events

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Sectors

► Primary/land-based► Industry► Infrastructure► Financial► Public health

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Primary/land based sectors

► Agriculture:– Changes in temperature and rainfall patterns– More frequent extreme weather events – droughts,

floods, storms, erosion, rural fires, reduced frost risk– Agriculture is highly dependent on climate, but also

highly adaptive– Increase in crop yields in some regions, decline in

others, change in risks to animal health– Changes in crops grown, where grown, length/timing

of seasons– Transitional costs in changing land uses– Exotic pest and disease risks

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Primary/land based sectors

► Agriculture:– Pastoral sector – increase in productivity (at least initially) from

more carbon dioxide in atmosphere and extended growing season, reduced feed quality in some regions due to drier weather, droughts, pests and diseases

– Arable sector – higher yields from more carbon dioxide in atmosphere and warmer conditions, but dependent on higher fertiliser input and availability of water for irrigation

– Horticultural sector – may be some change in regional distribution, change in timing of season, warmer and longer growing season but some species require winter chill (e.g. kiwifruit), may be some reduction in quality (e.g. grapes), increased pest and disease risks

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Primary/land based sectors

► Agriculture:– Export markets – depend also on what happens in

export destinations and countries of competing producers, change in demand patterns (destinations and timing of seasonal demand)

– Greater variability of production – rapid response to international markets and prices is more difficult for crops that require long-run investment such as viticulture and forestry

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Primary/land based sectors

► Forestry:– Higher temperatures, carbon dioxide and rainfall –

may increase forest growth and productivity in some regions, whilst decline in other regions

– Change in species that can be grown and where– Drier, hotter summers – limit planting to areas with

sufficient water supply, summer droughts increase tree mortality

– Increased storm damage and forest fires– Exotic pest and disease risks

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Primary/land based sectors

► Forestry:– Increase in commercial planting for carbon capture– Substitution of wood products for more emissions and

energy intensive alternatives such as concrete, steel and aluminium

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Primary/land based sectors

► Fisheries:– Changes in sea temperatures, prevailing winds and currents –

affecting species habitat and nutrient upwellings– Decline in stock (e.g. hoki), migration to other areas (e.g. tuna),

heat stresses and growing parasite threats (e.g. lobster)– Aquaculture – warmer temperatures may increase growth rates

in some species and allow farming of different species – Rivers and lakes – floods and droughts, changes in water level,

quality and temperature, disturbed breeding season and reduced fish egg survival

– Toxic algal blooms, exotic pests and diseases

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Primary/land based sectors

► Tourism and recreation:– Like agriculture, highly adaptable to changes in

opportunities– Warmer winters and drier, hotter summers – increase

some domestic tourism opportunities, extend tourist and sports season in some areas, increase outdoor recreation and sports

– Wetter winters and more frequent extreme weather events – disrupt outdoor recreation and sports, damage facilities

– Drier summers – more water shortages in some tourist areas

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Primary/land based sectors

► Tourism and recreation:– Coasts – accelerated beach and cliff erosion, damage to coastal

properties– Mountains – less snow based recreation– Lakes – may lower some lake levels, requiring relocation of ports

and shore infrastructure– Changes in habitats and damage to natural environment – affect

nature based tourism and recreation– Increased risk of establishment of exotic pests and diseases –

threat to biodiversity, conservation, public health and recreation– Reduced international and domestic travel if emissions cost

reflected in price of flights and other transport

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Industry

► Damage to stock and buildings from floods, storms and subsidence

► Change in insurance risk profile, claims and premiums► Exposure of outdoor workers in hotter summers► Higher transport costs if carbon priced into transport fuels► Changes in and/or more disruptions to supply chain► Change in demand for seasonal goods and services► Opportunities for research, innovation and

entrepreneurship► Development of new technologies, goods and services,

markets, businesses and jobs

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Infrastructure

► Infrastructure damage – more subsidence from hotter, drier summers and damage from extreme weather events such as droughts, floods and storms

► Coastal infrastructure:– Floods, storms, increased wave heights, rising sea

levels– Erosion and damage to transport infrastructure,

bridges, port facilities, utilities, settlements (housing, businesses), farm land

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Infrastructure

► Transport:– Damage to infrastructure (e.g. roads, rail tracks,

bridge/embankment foundations, ports, runways) – subsidence in hotter, drier summers and damage from extreme weather events such as droughts, floods and storms

– Disruption of transport services and risks to safety from extreme weather events and infrastructure damage

– Discomfort for travelers – higher temperatures, poorer air quality– Increase in walking and cycling– Incentive for development and use of more efficient vehicles,

electric vehicles, biofuels, changes in modes of transport, reductions in travel

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Infrastructure

► Water:– Damage to water and wastewater service

infrastructure, disruption to service, pressure on drainage and stormwater systems from heavy rainfall

– Increased importance of water management, including pricing and allocation

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Infrastructure

► Energy:– Infrastructure damage – more subsidence and other damage

from hot weather, floods and storms– Increase in hydro and wind power – change in rainfall and wind

patterns, increasing energy production in some regions– With carbon pricing:

• Renewable energy sources become cheaper relative to use of fossil fuels

• Incentive for research and investment in renewable energy sources – wind and solar energy, fuel cells – reducing the price of electricity produced from these sources, increasing jobs locally

• Incentive for research and investment in energy efficiency, low emissions technology and carbon capture, development of energy management technologies and services

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Infrastructure

► Energy:– Higher demand for air conditioning in summer, lower

demand for heating in winter, change in seasonal demand patterns, more variability in demand from extreme weather events

► Telecommunications – damage to cables, towers, etc.

► Damage to private property, affecting property values and insurance claims and premiums

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Infrastructure

► Population:– Changes in domestic migration patterns – for work

and retirement– Increase in immigration/environmental refugees from

overseas – population growth and rising sea level in Asia-Pacific region

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Financial

► Insurance – more claims on weather related damage, but fewer cold-weather related claims

► Investment – change in commercial risk profile, change in where and what invest in

► Emissions trading – opportunities for buying/selling entitlements domestically or in international schemes

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Public health

► Injuries from extreme weather events – floods and storms► Exposure, respiratory and heat stress in hotter summers/heatwaves► Reduction in cold weather-related morbidity and mortality► Increased opportunities for physical recreation► Reduced availability and quality of drinking water in some areas► Rise in foodborne illness in hotter summers► Increased bacterial growth and pest activity (flies, rodents) in longer,

hotter summers and milder winters► Increased risk of subtropical pests and diseases establishing in New

Zealand – mosquito vectors for Ross River virus and dengue fever

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Economic impact assessment

► Can model possible/probable scenarios of economic impacts on sectors

► To assist planning and decision-making:– Which risks to worry about most– Which are the best mitigation or adaptation options– Where to focus research efforts – on those uncertainties where

better information would make most difference to decisions ► Accuracy depends on accuracy of model inputs, including

science► Monitor and review:

– To revise and refine model and revisit decisions as better information becomes available

– To monitor for thresholds that would trigger reviewing or altering decisions