Are there alligators in your economic models?
This is adapted from last month's opening address to the Institute & Faculty of Actuaries Sessional meeting on Climate change for financial assumptions. The key point was to highlight the importance of understanding climate or policy implications when making projections for economic impacts of climate risks.
“ALLIGATORS basking off the English coast; a vast Brazilian desert; the mythical lost cities of Saigon, New Orleans, Venice and Mumbai; and 90 per cent of humanity vanished. Welcome to the world warmed by 4 °C.”
So started, a 2009 New Scientist article based on the then latest Science from a Met Office conference.
Why quote this article?
Well, 4 degrees is often used in scenario projections and it is the current trajectory suggested by many sources including the US government. And yet, I quote 2009 article as most sources that I can find come from that 2009 conference & a follow on in 2011 albeit that the science since then has generally suggested larger not smaller impacts.
Understanding the implied real world impacts is important for scenario modelling. Otherwise there is a potential disconnect if economic influences are merely extrapolated. I encourage all actuaries to look into the climate science to get a broad sense of the implied reality. What is implied by, say, peak carbon emissions in 2020 or by projecting a 4 degree warming?
4 degrees warmer is more than the Pliocene, three million years ago when the northern hemisphere was free of glaciers and sea levels were 25 metres higher The 2009 science based predictions for a 4 degree warmer world include:
Summers in the south of England regularly reach 45C, akin to today’s Marrakesh. Desertification of Europe south of the Alps, making South of France, Spain, & Italy as uninhabitable as the Sahara is today.
Uninhabitable desertification also applies to the Middle East, whole South of US, and almost all of Africa
85% of the Amazon forest is lost. Ocean acidification leads to a collapse in fishing stocks
Sea levels: conservative estimates have 2 m rises in the next century with long-run estimates from 9 m to 40 m or more
... and I haven’t even touched on the impact for agriculture which is likely to be significant even at 1.5 or 2 degrees of warming.
Now, I’m not a climate scientist, and can’t vouch for this work. These predictions not come to pass or may reflect worlds at 5,6,7, or 8 degrees of warming. But I am struck by the disconnect between some economic modelling and the impact on civilisation that even more modest versions of these projections suggest.
As a profession, actuaries should become better aware of these potential physical impacts to ensure realism in our projections and to better highlight the transition imperative of an inevitable policy response.