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Tipping Points Pose Risks to Investors, Challenges to Policymakers

Academics estimate social cost of carbon across eight climate milestones, warning of “clear implications for financial markets”.  

Investors face higher costs and risks if policymakers fail to account for potentially steep economic and social impacts from breaching key climate tipping points, such as the melting of the Greenland Ice Sheet.  

This is according to researchers from the London School of Economics and Political Science, New York University and the University of Delaware, who have calculated that the collective impact of eight climate tipping points could increase the average social cost of carbon (SCC) by 24.5%.  

The purpose of the research is to present policymakers with a more quantitative assessment of the social costs – and resulting economic risks – posed by climate tipping points. These need to be “better reflected” in future policy, the paper noted. 

The SCC is measured by adding up all the quantifiable costs and benefits of emitting one additional tonne of CO2 in monetary terms, using existing econometric evidence and simulation modelling. That value is then used to measure the benefits of reduced warming compared to the costs of cutting emissions. It can be used to “set carbon prices and inform mitigation efforts,” the paper said. 

Last week,  the first part of the Intergovernmental Panel on Climate Change’s sixth climate assessment warned that climate change is taking place faster than previously anticipated, predicting that global warming would reach 1.5 degrees above pre-industrial levels by 2040 under five different scenarios, commenting also on increased incidence in severe weather events and rising sea levels.

Mixed carbon market messages

According to the World Bank’s Carbon Pricing Dashboard, there are currently 64 carbon pricing initiatives in operation – predominantly across Canada, Europe and China – covering 21.5% of global emissions.  

The cost of carbon emissions has risen sharply this year, reflecting both regulatory changes and increased urgency, but is still regarded as too low to encourage transition at the level required to limit climate change.

The carbon price of the EU Emissions Trading System (ETS), which previously averaged around €30, increased to more than €50 in May. An ETS puts a price on emissions, charging carbon-intensive sectors for the greenhouse gases (GHGs) they emit. With China’s ETS entering into force in February, it’s expected that there will be a more significant decrease in GHGs from one of the world’s largest emitters. Further, the UN-convened Principles for Responsible Investment (PRI) has predicted that the US could announce a national carbon price of US$65 per metric tonne by 2030. 

However, a lack of transparency and monitoring in voluntary carbon markets has led to the recently launched Voluntary Carbon Market Integrity (VCMI) initiative publishing draft guidelines for company claims around the purchasing of carbon credits, which are used to offset or compensate for emissions at an organisational or product level. 

Unified estimates of economic impacts

Tipping points refer to thresholds within the climate system that, when exceeded, will have a large and, in some cases, irrevocable change on the world. The paper considers: thawing of permafrost; dissociation of ocean methane hydrates; arctic sea ice loss; dieback of Amazon rainforest; disintegration of Greenland Ice Sheet; disintegration of the West Antarctic Ice Sheet; slowdown of the Atlantic Meridional Overturning Circulation; and the variability of the Indian summer monsoon. 

A higher SCC has “clear implications for financial markets” as higher risks will require investor compensation, according to the paper, titled: ‘Economic impacts of tipping points in the climate system’ 

“Climate scientists have long emphasised the importance of climate tipping points. Yet, save for a few fragmented studies, climate economics has either ignored them, or represented them in highly stylised ways. We provide unified estimates of the economic impacts of all eight climate tipping points covered in the economic literature so far,” said Simon Dietz co-author and Professor at the LSE’s Department of Geography and Environment and the Grantham Research Institute on Climate Change and the Environment. 

Predicted economic losses would be felt everywhere in the world. Further, there is a 10% chance that the 24.5% SCC projection could be doubled and a 5% chance it could be tripled, the paper warned. Currently, the dissociation of ocean methane hydrates (ocean warming resulting in methane leakage on the seafloor) is responsible for more than half of the median predicted SCC increase. 

Further research required

SCC predications are far from definite because it’s hard to predict when these tipping points could occur and to accurately determine the degree of impact, as this will be influenced by human action taken to limit the pace of global warming. The university researchers determined that the overall SCC increase ranges between 4.1% and 49.2%, depending largely on how many tipping points are breached in the measured period of time. 

Further, the calculated SCC only accounts for eight climate tipping points. Other potential impacts to consider include the Boreal Forest dieback and the variability of the West African monsoon.  

As more tipping points are taken into account, and more scientific evidence emerges detailing the effects of climate change, predicted SCC growth could increase exponentially, the paper warned. 

“Tipping points in the climate system are one of the principal reasons for concern about climate change. Climate economists have only recently begun incorporating them in economic models. We synthesise this emerging literature and provide unified, geophysically realistic estimates of the economic impacts of eight climate tipping points with an emphasis on the SCC, a key policy input,” the paper noted.  

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