Economics of Climate Adaptation

Shaping Climate-resilient Development Economics of Climate Adaptation A Framework for Decision-makers Dr. David N. Bresch, Head Sustainability & Political Risk Management, Swiss Re david_bresch@swissre.com www.swissre.com/floodriskapp 1

Leading scientists expect a continuing rise of the global mean temperature IPCC AR4* multi-model averages and assessed ranges for surface warming** 6.0 Global surface warming ( o C) 5.0 4.0 3.0 2.0 1.0 0-1.0 Year 2000 constant concentrations ~4 C ~1.9 C temperature range according to global emissions scenarios 1900 2000 2100 Source: IPCC A 2 C outcome would be desirable, but very unlikely to be achieved Even if we stop all emissions today, climate is still going to alter We need to adapt to a changing environment In case you missed the link: www.swissre.com/floodriskapp 3 Nat Cat losses on the rise and: Massive gap between economic and insured losses Natural catastrophe losses 1980-2010, in USD billion 300 250 Economic Loss (grand total) Insured Loss (grand total) 200 150 100 50 0 1980 1985 1990 1995 2000 2005 2010 Note: Loss amounts indexed to 2009 2010 Source: Swiss Re, sigma catastrophe No 2/2010 database In case you missed the link: www.swissre.com/floodriskapp 4 2

The key driver so far Ocean Drive, FL, 1926 Ocean Drive, FL, 2000 5 Climate risks are highly inter-connected GHG emissions Storms Flood Sea level Drought Ecosystems Climate Change Food security Energy security GHG regulation Investments Migration Conflict Health effects Slide 6 6 3

As global warming accelerates scientists expect increasingly drastic impacts Temperature change (relative to preindustrial) Weather 1º C 2º C 3º C 4º C 5º C Rising intensity of storms, forest fires, droughts, flooding, and heat waves Scenario A1B IPCC AR4 worstcase scenarios Water Threat to local water sup-ply due to loss of glaciers Changes in water availability, threatening up to 1 bn people Major world cities threatened by sea-level rise (e.g., London) Food Falling crop yields in many developing regions Yields in many developed regions decline Ecosystem Social Coral-reef ecosystems extensively and eventually irreversibly damaged Considerable number of species face extinction More than 1 bn people at risk of having to migrate increased risk of conflicts GDP Loss of GDP in developing countries Potential loss of up to 20% of global GDP Source: Stern Review; IPCC 7 There are two main levers to combat climate change Temperature change Weather Water Food Ecosystem Social GDP 1 Mitigation* 1º C 2º C 3º C 4º C 5º C 2 Adaptation Private sector engagement Energy efficiency Renewables Clean tech/low-carbon growth Risk prevention Physical infrastructure Process/technology optimization Risk transfer and financing last but not least: incentivizing prevention *Mitigation: reduce GHG emissions + need for behavioral changes 8 4

Economics of Climate Adaptation Provide decision makers with the facts and methods necessary to design and execute a climate adaptation strategy to increase climate resilience 9 Economics of Climate Adaptation Shaping climate-resilient development A methodology that provides answers to questions such as: What actions do cities and countries need to take in order to ensure that critical infrastructure including transport, energy, water and IT remain protected from the threats associated with rising sea levels and flooding? What further resilience measures do countries need to invest in? How should governments balance the costs of resilience with the costs of response, and who should pay? How can the private sector be engaged in improving national resilience and developing adaptation strategies? The Economics of Climate Adaptation (ECA) methodology provides decision-makers with a fact base to answer such questions in a systematic way. It enables them to understand the impact of climate change on their economies - and identify actions to minimize that impact at the lowest cost to society. It therefore allows decision-makers to integrate adaptation with economic development and sustainable growth. Please find the full study at www.swissre.com/climatechange 10 5

Economics of Climate Adaptation: Climate-resilient development needs to address total climate risk Objectives: Provide decision makers with the facts and methods necessary to design and execute a climate adaptation strategy Supply insurers, financial institutions, and potential funders with the information required to unlock risk prevention funding and deepen global risk transfer markets Key features: Developed a methodology to quantify local total climate risks, meaning it looked at the combination of today s climate risk, the economic development paths that might put greater population and value at risk the additional risks presented by climate change. The team: Economics of Climate Adaptation Working Group, a partnership between the Global Environment Facility, McKinsey & Company, Swiss Re, the Rockefeller Foundation, ClimateWorks Foundation, the European Commission, and Standard Chartered Bank. Please find the full study at www.swissre.com/climatechange 11 The working group studied seventeen regions with diverse climate hazards Mali U.K. / Hull China North, Northeast US Gulf coast Florida India Maharashtra Samoa Samoa Guyana Tanzania Anguilla, Bermuda, Barbados, Jamaica, Antigua and Barbuda, St. Lucia, Dominica All details: www.swissre.com/climatechange 12 6

13 Climate change impacts, city of Hull, UK 3 possible scenarios Key uncertainties exist around climate change resulting in highly variable predictions and outcomes Future development of emissions and global warming uncertain Local impact of climate change on weather variables uncertain Development of 3 different scenarios required to account for these uncertainties 2030 scenarios Description 1 Today s risk No change in climate, historical events used as baseline 2 Moderate change A2 scenario as underlining global emission scenario Varying parameters for each return period, (storm surge height increase 16-26 cm; increase in extreme precipitation up to 3.3% 3 High change Worst case assumptions within the hazard modeling used (storm surge height increase of 31-42 cm; increase of 8.3% in extreme precipitation) 14 14 7

What is at stake? Economic growth is the key driver of losses until 2030 Example city of Hull, UK: Expected loss from exposure to climate Extreme climate scenario, USD millions Potential impact from economic growth 17 96 56 23 Potential impact from change in climate +71% 2008, today s expected loss Incremental Incremental increase from increase from economic growth; extreme climate no climate change change scenario 2030, total expected loss Please find the full study at www.swissre.com/climatechange 15 15 How could we respond? Adaptation cost curve, city of Hull, UK Cost/benefit 7 6 5 4 3 2 1 0 Measures below this line have net economic benefits 0.01 0.03 0.08 0.13 0.25 0.28 0.39 0.49 0.65 0.77 1.54 1.67 300 50 500 550 700 750 800 900 950 0 1,000 1,050 850 1,100 1,150 Flood awareness campaign Sea defence east 65% of losses can be averted cost-effectively Sea defence west River Hull defence Mobile protection for content Train staff in emergency response Hydraulic barrier upgrade Flood proofing of floors new building Sandbag buildings strategic location Insurance is less costly an option than further hard measures 1.68 Increase drainage systems Insurance w/rent Insure public buildings Insurance w/ contingent capital 1.90 2.15 Decrease SME insurance Insurance Source: Shaping Climate resilient development, Swiss Re, McKinsey et al., 2009 Build new buildings on podium Closed cell new buildings Sandbag buildings general 3.30 Flood proofing of floors existing buildings EXTREME CLIMATE CHANGE 4.80 Closed cell insulation existing buildings 5.60 Measures with net negative benefits 5.60 6.20 Roof foam existing buildings Stronger roof fixings existing buildings Roof netting existing buildings www.swissre.com/climatechange Averted loss $ Millions 16 8

How could we respond? Adaptation cost curve, US Golf coast Study commissioned by Entergy 30% of losses can be averted cost-effectively 1 Estimated present value out to 2030 at 2009 Dollars. FPSO: Floating production storage and offloading http://media.swissre.com/documents/entergy_study_exec_report_20101014.pdf 17 How could we respond? Risk transfer more cost efficient in addressing low frequency events US Golf coast case study, commissioned by Entergy Loss for 100-year event $ Billions 213 74 Loss covered In percent of residual risk to be covered Further physical measures 41% Cost benefit ratio Ratio 15 45 94 Risk transfer 100% 2 Total loss Loss averted by cost efficient measures Maximum bearable loss Risk to be covered Risk transfer offers the full desired level of coverage and is more cost-effective than remaining physical measures SOURCE: Swiss Re, Wharton Project on Managing and Finance; Sigma database; team analysis 18 9

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