Buckle Up. Climate Change Could Destroy Half Our Economies

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Today's Issue: Climate Change. Our Economies. The Damage.

So. How bad is it going to get? Climate change. It's economic effects, in particular—which is just a way of saying: what scale, scope, level of havoc will it wreak? That's today's Issue.

Startling new landmark research has just been published. It's conclusion? Half of our economies could be destroyed by 2070. Let me emphasize that again: 50% of GDP. By 2070. Gone. Burned, drowned, incinerated, levelled, flooded. How bad is that? It's even worse...than it might sound. I'm going to put that in context for you in just a moment, but first I want you to understand why this research matters, beginning with the source.

Where does this research come from? "Alarmists"? An advocacy group? Activists? Is it based on tenuous logic and cherry-picked data? It comes from a place that's about as sober and serious and conservative a group of professionals as you can get. The British Institute of...Actuaries. I'm going to cite their report, which I recommend you peruse, too, if you're interested. Because, well...

It's hard to think of a more objective source than an Institute of Actuaries. That's because they have no reason, none whatsoever--to be alarmist, to overstate the case. In fact, they have every reason to understate the case, because of course actuarial science is at the heart of insurance, and insurance companies generally want to sell more of it. But the actuaries are trying to arrive at the clearest, truest picture they can, because the insurance industry depends critically on it. So already, it's a trusted source, a reputable one, and we should all take a moment to listen seriously and intently. There are those who still refer to any discussion climate change's mega-scale impacts as "scaremongering"--and sadly, too much media legitimizes them. So what do...actuaries...whose entire careers are assessing numbers and risk...think? Is climate change just fearmongering—or a real, urgent, serious problem?

What the insurance industry—not to mention the economy at large—really doesn't want to have is what's coming to be called a "Climate Minsky Moment." What does that turn of phrase mean?

Minsky was a financial economist--one who wasn't taken too very seriously by other economists, for a very long time. He came up with a theory which said that markets could suddenly lose confidence, if the value of assets was revealed to be much lower in reality than on the books, in a moment. Economists didn't take this seriously, and neither did Wall St--because they had ultimate faith in their modellers and estimators. And then came the Great Recession of '08. Remember what happpened then? The housing market plummeted—just the way Minsky said: many loans were revealed to be junk, had gone bad, couldn't be repaid. The economy seized up. That was a Minsky Moment—it happened, and now, Minsky's revered amongst econ and finance nerds.

So what's a "Climate Minsky Moment?" The thinking now--like that advanced in this research by the Institute of Actuaries--is that climate change is setting us up for a similar effect to the Great Crash of 2008. Assets (buildings, investments, homes, money itself, everything) are overvalued, because models aren't accounting for risk well, accurately, severely, hard enough. What kind of risk? Mega-scale risk, of the biggest kind there is.

Take a glimpse around the world. What do you see? The mega-scale impacts of climate change were theorized to arrive around 2050. They're arriving now. This is something like our First Extinction Summer. People are startled and bewildered to see the planet going haywire. First, Greece went up in flames. Canada's still burning from coast-to-coast, and nobody knows how to put out the megafires. Lahaina, the historic town on Maui, was levelled, incinerated. Ocean temperatures have soared off the charts--and Antarctic ice is melting at disturbing rates, and not reforming fast enough to be considered "normal." 2050 is arriving...right now.

That gives you some feeling of what a Climate Minsky Moment is. The climate models weren't wrong--but all this is happening far too fast, and far too suddenly, for anything remotely resembling comfort. A reckoning appears to be upon us. And that's compounded by the fact that the models we're talking about above are just climate models. Economic models? They assume all kinds of fantastical, bizarre, flat-out nonsensical things--which let them underprice the costs of climate change, in fairly incredible ways. That's the point the Institute of Actuaries makes: we're severely underpricing climate risk, and so we're now incurring a whole new kind of, other level of, risk--that of a Climate Minsky Moment, a sudden reckoning where we discover, wait, the damages are far, far higher than we thought they were, just like in the housing crash of '08. And that's how crashes happen.

That's why the Institute of Actuaries called this report "The Emperor's New Climate Scenarios"--they think the underpricing of costs of climate change is...fiction. Let me give you some concrete examples from the report.

That's an elegant way to put it. We're at 1.2 degrees, maybe hitting around 1.5 this summer. And the damages are already growing severe. Towns incinerated, places levelled. Canada's emitted more carbon from it's continent-wide megafires than from any other source this year. Crops are failing, water's at risk, and the air's unbreathable for days at a time in growing numbers of places that never expected it. 3 degrees? That means entire regions of the world grow uninhabitable, basic systems for food and water fail, social contracts snap, and democracy slides away. To imagine all that's just going to incur a cost of just 2% of GDP...well...does that sound plausible to you?

In fact, the situation's even more bizarre than that. Central banks have begun to finally, slowly incorporate climate change into their models--every central bank has one, that predicts how the economy of its country will behave. But many of these models assume that GDP will grow faster in a "Hothouse Earth" scenario, incredibly. That's because of surreal assumptions, like new trade routes opening where there used to be ice. But imagine a planet of widespread crop failures, where water's in shortage, and wet bulb events have spread to limit habitability--does that sound like a place where business as usual goes on, and grows? Of course not--even a town like Lahaina levelled represents a serious, calamitous loss of...everything. Life, possibility, buildings, activity, economy. The idea that the most extreme climate scenarios will increase GDP growth is...the kind of thing that gives economists a bad name.

Think for a moment of how...surreal...funny..absurd what the actuaries are pointing out here is. The worse climate change scenarios...conclude...higher GDP growth. Despite what we've already begun to see are severe mega-scale impacts. That's because the "damage functions" in these models aren't well thought out--instead of assuming damages, they actually assume there'll be significant, widespread benefits of a Hothouse World. And while that may even be true in some kind of idealized way--billionaires get even richer--that kind of planet assuredly isn't going to be one where people are living in safety and peace, among democracies, their rights guaranteed, sustenance assured, and all is well. Quite the opposite. If 1.2 degrees hitting 1.5 was this summer--what does 4 even look like? It's not going to be pretty. Damage functions that don't even bother assuming...damages...the actuaries are saying, aren't worth the paper they're written on.

Let me go back to why that matters to them. They're serious and sober people because huge, huge amounts of capital are on the line. If they don't get this right, what happens? Insurance companies are on the hook. For billions, trillions, they won't be able to pay. They'll go under. And that crash will make '08 look like a cakewalk, because it'll be on a scale an order of magnitude greater. Conversely, when actuaries do get these models, ideas, functions, predictions right—or at least righter—insurance companies can make wiser decisions, and not go broke, in a sudden Climate Minsky Moment.

Why have insurance companies already begun to pull coverage in places like California and Florida? Precisely because their internal estimates of damages must be soaring. They've already calculated that they're not going to be able to pay what's coming, and so they've simply pulled. That, in turn, is because their actuaries are beginning to take climate damage seriously--and are realizing that we've underpriced climate change. Rapidly, suddenly, they're revising their damage functions, or just estimates, upwards--and realizing they can't even do business in places anymore. Game over. That's how serious this is--and that's why the Institute of Actuaries issued this landmark report, to send a firm, clear signal across the industry, that if nobody's going to take climate math seriously, they're going to, because colossal amounts of capital are at risk.

What are they saying here? They're talking about, basically, how tipping points are at the verge of being hit. By now, everyone should know what climate tipping points are. The boreal forests dying back--which is what looks like is beginning to happen in Canada. The melting of the permafrost. The loss of polar ice. Methane release. There's a good list, here, in this paper. As we come closer and closer to  hitting tipping points, the actuaries note, the risk increases nonlinearly. It rises in a curve, not in a line. That means that "damage functions"--or just how much havoc will be wreaked, in plain English--accelerate, too. That's what we're thinking about, the ultimate costs. Tippint points aren't isolated--they interact, one hitting the next like dominoes, and the actuaries, reading their climate science well, understand that because of those dynamics, risk spins out of control, fast, too.

And that's how you get to a Climate Minsky Moment.

So what do the actuaries--probably the most sober, serious people on planet earth, who have no reason to overstate, who are the precise opposite of "alarmists"--conclude? Something that I find chilling. But you can judge the feeling in the pit of your stomach for yourself.

That's a startling result, doubly so, for an organization as sober as an Institute of Actuaries, to say out loud. 50%  GDP destruction somewhere between 2070 and 2090. Let me caution you with some context. They're not saying that has to happen. This isn't a prediction. It's a scenario, depending on how we act, and what the damages end up being. It's a possibility. But it's not a remote or random one, a mere guess—it's an estimate informed by clearer assumptions about damage functions, and how they're distributed at different degrees of warming. It's a this-could-happen-and-has-a-good-chance-of statement about distributions of probability. If we don't get our act together, much faster, that's the kind of world of risk we're headed towards.

Why do I say those are startling results? Because the Institute of Actuaries is sending a clarion call here. To...institutions across the world. Banks, central banks, investment funds, insurance companies, politicians. It's saying that nobody much has taken the costs of climate change seriously yet--this is the first proper, thorough, rigorous estimate of where we're headed. When we do serious math, not just spitball convenient fantasies like a Hothouse Earth will somehow increase GDP, troubling conclusions emerge. Combining climate science with actuarial statistics says that the damages heading our way appear to be, could be, land in estimates of...astronomical.

What's "astronomical"? During the Great Depression, GDP fell by 10-15% in real terms. During the Great Recession of '08, it fell by about 5%. Covid, about 4%. We're talking about an event at a completely different scale, off those charts, in another economic universe altogether. Something ten times the magnitude of what happened during 2008, or the early years of the pandemic. That's the economic equivalent of mega-scale weather: something we've never really seen before, like continent-scale megafires we don't know how to put out. It's bigger than anything in history, by a very, very long way.

Big enough, in fact, that it raises the spectre of Civilizational Risk. Can a civilization survive a hit of 50% to its GDP? Historically, most don't. This order of magnitude is the stuff of very real civilizational collapse. What could cause that level of damage? When, say, an ancient civilization's main source of water dried up, or there was an entire season of droughts or famines, or irrigation simply stopped working, or a crucial resource just ran out. Those are the only real examples we have in all of history of losing 50% of GDP. It's  a colossal, enormous number to us economists—it's so big that it's like saying half your body stops working. Imagine half the economy—gone, just like that, for any civilization. Almost surely a civilization killer.

That's how immense and serious the stakes are here. The actuaries are telling us that our Civilizational Risk is higher—much higher—than we imagined it is. Continue to imagine it is, in theories and models, which are already badly obsolete. That it's very real, severe, and growing, into a level of risk that's off the historical charts. It's a cliff edge we don't want to toy with, because everything's at stake.

That's a lot to take in, so reflect on it, think about it, consider it carefully. Like I said, I urge you to read the report and the FT article covering it both. This is stuff—facts, knowledge, conclusions, numbers, data about our world today—everyone should know. You won't see it in the headlines, unfortunately. That's why we made it an Issue.

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