Carbon Emissions Could Cost $8 Trillion Over the Next 20 Years

The economic cost of carbon emissions over the next 20 years could amount to $8 trillion, according to a study by investment consultants Mercer.

This is what will happen if countries continue with a 'business-as-usual' approach to climate change until 2020, the report warns, when tough coordinated mitigation measures will force up the price of carbon to $220 per tonne of carbon dioxide equivalent (CO2e) by 2030. 

This 'delayed action' scenario is deemed the second most likely of four scenarios outlined in the study. Under the most likely scenario - 'regional divergence' - different countries take different approaches and the carbon price in most regions reaches around $110/tCO2e in 2030.

A much less likely scenario - 'Stern action' - would see swift, coordinated global action, as advocated in the Stern Review of 2007 and a global carbon price of $110/tCO2 in 2030.

The least likely scenario, the authors say, is 'climate breakdown', in which there is no mitigation action beyond current efforts and the price of carbon remains around $15/ tCO2e. However, as this scenario fails to curb global warming, it will potentially lead to the highest costs for regions, assets and industry sectors that are most sensitive to the physical impacts of climate change.

Mercer estimates that uncertainty over climate policy currently contributes 10% to the long-term risk of a representative investment portfolio comprising 34% large-cap equities, 26% investment grade credit, 18% government bonds, 13% emerging market equities and 9% property.

Diversify risk source, not asset class

To manage this risk, it says institutional investors will need to think about diversification across sources of risk, rather than across traditional asset classes. Increasing exposure to 'climate sensitive' assets such as timberland, agricultural land, infrastructure, and renewable energy and energy efficiency could help capture the potential upside and reduce the climate change risk of the overall portfolio, the authors say.

The study "will inform our work with our clients", promised Elizabeth Renshaw-Ames, worldwide partner at Mercer.

Other findings of the report, which was supported by the International Finance Corporation and the Carbon Trust and received input from 14 global institutional investors, include:

•investment opportunities in low-carbon technologies could reach $5 trillion by 2030;
•cumulative economic costs of changes to the physical environment, health and food security could amount to $4 trillion by 2030; and
•the EU, China and East Asia are likely to lead the transition to low-carbon economies. 

By. Graham Cooper

Source: Environmental finance