Climate change: one degree of additional warming costs Italian companies loss of revenue

Over one million companies analysed for ten years (2009-2018): Centre and North-East are the most affected areas. The largest losses are in the construction, finance, mining and ICT sectors, with little damage to tourism, agriculture and transport.

 

Climate change is costing the economic system a lot of money: looking at ten years (2009-2018), one degree of additional warming has led to an average reduction in turnover and profitability of -5.8% and -3.4%, respectively, for Italian companies. If we then consider the actual changes in temperature in the various geographical areas, in 2018 alone – a particularly hot year – our business network recorded a loss of revenue of Euro 133 billion, with the greatest percentage losses in the North East and the Centre.

This is what emerges from the first year of activity of the Climate Finance Observatory of the School of Management of the Politecnico di Milano, which on 27 April 2021 presented its main results at an online conference attended by institutions, businesses, investors and trade associations. Global warming is now fully an economic issue.  “We have developed a database that crosses economic/financial information on 1,154,000 companies in Italy between 2009 and 2018 (22 million in Europe) with meteorological data on temperature, rainfall and solar radiation since 1950 – explains Vincenzo Butticè, vice director of the Observatory – to find solid empirical evidence on the relationship between climate and the economic system“. This has resulted in reliable metrics to support regulators, financial institutions and manufacturers in their economic/financial analysis of climate change.

The Observatory has in fact calculated the real, not hypothetical, damage caused by an increase in temperature of 1 degree Celsius in Italy: small enterprises have lost the most in profitability, while large companies, being able to act better on costs and processes, despite a decrease in revenues and demand, were better able to contain their losses in margins.

Among the sectors most affected by the temperature increase are construction, finance and mining. Information technology, real estate and research and innovation suffered the same drop in turnover (-6.4%), but with a smaller decrease in margins. Manufacturing and retail were the best performing sectors, preceded only by agriculture, tourism and transport.

On the other hand, in geographic terms, the impact was worse in Central Italy and the North East, where companies managed to maintain higher margins. The North West suffered a sharp loss in profitability but not as much in turnover, while the South and Islands were little affected by climate change.

If we look at the drop in turnover in absolute figures, the biggest losses were recorded in Lazio, Lombardy, Emilia Romagna and Tuscany.

Managing the consequences of climate change and mitigation strategies represent the greatest challenge that world economies will have to face in the coming years – comments Roberto Bianchini, director of the Climate Finance Observatory -. For example, the analysis shows how a flood could cost companies in the affected area up to 4% of turnover and a loss of value of balance sheet assets of around 0.9%, which rises to 1.9% in case of a large fire. The global emergency related to the pandemic has also contributed to increasing the perception of risk, because it has shown how economic actors are affected not only directly, but also indirectly, through the channels of demand, supply or their own supply chain”.

On the regulatory side, both the European Commission and the regulatory agencies produced a large number of documents in recent months to improve understanding of the interrelationships between climate risks and economic activities. One example is the “Green Taxonomy”, a document that identifies actions within different sectors that can promote climate change adaptation and mitigation while avoiding negative impacts on the environment.

It is extremely important to identify risks and to find tools and metrics to quantify the climate exposure of portfolio assets. The action of the ECB is relevant in this direction: it carried out an analysis of about 4 million companies and 2,000 banks to identify the exposure of the financial system over the next 30 years. The study shows that the costs for implementing adaptation and mitigation strategies now are far lower than they are likely to be in the future: according to the ECB, the probability of default of banks will be higher the less action is taken by the economic system to change the trajectory of temperature increase.

 

For more information: https://www.osservatoriefi.it/efi/2021/04/28/climate-change-finance-rischi-e-opportunita-per-le-imprese/ (in Italian)

The impact of climate change on economic growth

 

Climate change can reshape natural ecosystems, threatening life on Earth physiologically, but also economically. By analysing the economic impact of global warming, we can understand why this is a risk we cannot afford to take.


Massimo Tavoni, Full Professor of Climate Change Economics, School of Management Politecnico di Milano, and Director of the European Institute on Economics and the Environment

Climate change will have a profound impact on both ecosystems and human beings. Some of these kinds of impact are not quantifiable from an economic point of view because they have consequences such as the extinction of ecosystems and species. Others have been quantified, especially those which have an impact on production factors such as labour, capital and natural resources. Climate economists have been dealing with this problem for several years now, but to date, estimates regarding economic impact remain a very bountiful research topic, the depths of which have not yet been plumbed.

Recently, alternative methods have been developed to estimate the economic impact of the climate starting from historical empirical data. This approach analyses how temperature changes over the past 40 years have influenced the economic growth of every country in the world, taking into account their institutional, technological and climatic differences. This retrospective assessment has revealed a non-linear relationship between temperature and economic growth: for cold countries (i.e. those below an ‘ideal’ temperature), an increase in temperature could benefit the economy and lead to additional growth. For warm countries, however, it appears to lead to diminished economic growth, more significant in scale the warmer the country is.

By applying these estimates to different future global warming scenarios, we can observe some extremely significant economic losses. For example, for global temperature increases of 3°C – a very likely outcome given current emission trends – these estimates predict losses of World GDP of between 15 and 60%. It is important to bear in mind that these studies – as they extrapolate the information of the past in a future with a different climate – do not include factors such as rising sea levels, ocean acidification, etc.: factors that would, on the whole, increase the economic damage to the climate. As a counterpoint to this, an increased level of adaptability could limit damage. The latest IPCC report on 1.5°C has shown that limiting global warming to 1.5°C instead of 2°C would save 1.5-2.0% of the world’s gross domestic product (GDP) by halfway through the century and 3.5% of GDP by the end of the century. Based on a 3% discount rate, this corresponds to $8.1-11.6 trillion and $38.5 trillion in damage avoided by the middle and end of the century, respectively.

As shown in the Figure below, the impacts of global warming on economic growth are not felt the same way around the world. Both today and in the future, economic losses will mostly be concentrated in hot countries, where further warming leads to strong economic decline. Hot countries are also, on the whole, poorer than cold ones. As a result, climate change will not just slow global economic growth, but also exacerbate global inequalities, actually hitting the countries which have contributed the least to manmade climate change the hardest. This is likely to be the source of strong international tensions.

Figure 1. Projected economic impacts of climate change. Source: Burke et. Al, Nature, 2015.

 

We can attempt to break down the direct and indirect economic impacts of climate change into their relevant sectors. An OECD study (Dellink et al. 2019) assessed a wide range of impacts: changes in crop yields, loss of land and capital due to rising sea levels, changes in fisheries’ catches, damage to capital caused by hurricanes, changes in labour productivity and changes in healthcare costs from diseases and thermal stress, changes in tourism flows and changes in the demand for energy for cooling and heating. The results show that damages are expected to increase twice as fast as global economic activity – the impacts on productivity in both labour and agriculture have the most severe negative economic consequences. The damage caused by rising sea levels will grow faster after the middle of the century. The damage to energy and tourism is very small from a global perspective, as the benefits in some regions outweigh the damage in others. Climate damage caused by hurricanes can have significant effects on local communities, but macroeconomic consequences are expected to be relatively small. In line with the studies listed above, the net economic consequences are expected to be particularly serious in Africa and Asia, where regional economies are vulnerable to a range of different climate impacts.

Given this worrisome outlook, what actions should companies, governments and citizens be taking? Economists agree that pricing carbon is a fundamental tool for discouraging fossil fuels and incentivising green innovation. Staying below 2°C would require putting a price of about 50 Euros/tCO2 on CO2 globally. This seems politically challenging, especially in fast-growing economies which rely heavily on fossil-generated energy. Complementary policies such as incentives for green innovation, as well as behavioural change measures by consumers, could help to kickstart the low carbon transition. We now have the technology to achieve this transformation at reasonably low societal costs, if it is well-designed. It is a question of political capital and public acceptance. Regions such as Europe have a unique opportunity to use this green momentum to restructure their economies and favour a more sustainable and inclusive model.