Climate scientists and investors could help each other in developing more granular models of the impact of climate change on specific areas. This is needed because the impact will be far greater than current economic models assume, Associate Professor Sarah Perkins-Kirkpatrick says.
In the previous edition of the [i3] Insights newsletter, we spoke to economist Steve Keen about the disconnect between economic models of the impact of climate change and those used by climate scientists.
One of the key problems Keen has with these integrated assessment models is that they don’t cater for ecological feedback loops or tipping points.
He argues they vastly underestimate the impact of global warming on societies and ecosystems that in turn would affect economies.
We decided to ask a climate scientist about what the world might look like at three to six degrees warming compared to pre-industrial levels.
Sarah Perkins-Kirkpatrick is an Associate Professor with the University of New South Wales, based in Canberra, and a chief investigator at the ARC Centre of Excellence for Climate Extremes.
Perkins-Kirkpatrick has co-authored a number of academic papers on climate change modelling, including one on acute climate risks in the financial system.
It's when you get the super big heatwaves that last a long time or those really intense rainfall events or hurricanes that are off the charts. They are the events that do catastrophic damage because they're outside of our coping capacity
Asked whether she agrees with Keen that integrated assessment models fall short in their assessment of climate risk, she acknowledges there is a problem with looking at historic temperatures.
“Just looking at average temperature or global mean temperature is not enough because ultimately any sort of impact from climate change comes in the extremes,” she says in an interview with [i3] Insights.
“A day being a degree or two warmer on average, well, everyone’s probably going to be reasonably fine with that. But it’s when you get the super big heatwaves that last a long time or those really intense rainfall events or hurricanes that are off the charts. They are the events that do catastrophic damage because they’re outside of our coping capacity.”
Perkins-Kirkpatrick gives the example of agriculture. It is not just a gradual increase in temperatures that causes problems, at least not in the first instance, but it is the extreme weather events that wipe out crops or make them nearly impossible to grow.
“It’s about how hot it gets. Do the wine grapes burn? Are we going to get any more frosts? Do we completely change when we plant our crops? What crops do we plant?” Perkins-Kirkpatrick says.
“We’ll not be able to have cows in certain parts of Australia because the heatwaves are just too intense for the cows. These are all things that would absolutely be humongous issues.”
Adaptive Failure
A widely-used integrated assessment model is the dynamic integrated climate-economy (DICE) model. In its latest update, it estimated global gross domestic product (GDP) will be negatively impacted by just over 12 per cent a year if global temperatures rise by six degrees.
But Perkins-Kirkpatrick says a temperature increase of six degrees is likely to be catastrophic to most regions around the world. “I can’t put numbers around how bad that will be if we warm by six degrees; it will be catastrophic in a lot of ways,” she says.
“For example, the atmosphere holds seven per cent more moisture on average for every degree it gets warmer. So if you think about a six-degree warmer world, how much extra moisture the air could store and then you have a tropical cyclone or a really intense thunderstorm come through.
“The amount of energy that would be released and the amount of rainfall that could follow that would be enormous.”
Already countries around the equator are experiencing severe storms that have led to catastrophic damage and death. In March, Ethiopia and Somalia experienced flash flooding from heavy rains after years of drought that affected 300,000 people.
But integrated assessment models such as DICE don’t take into account precipitation and this is a real oversight, Perkins-Kirkpatrick says. She points to the recent Black Summer bushfires in Australia, which occurred roughly between 1 July 2019 and the end of the bushfire season on 31 March 2020.
During this time, there were more than 11,000 bush and grass fires across New South Wales that burnt 6.2 per cent of the state – the largest burnt area recorded in a single fire season in eastern Australia. In total, 26 lives were lost and 2448 homes were destroyed.
We've already seen changes in extremes, a significant change, but in most regions that's not completely outside of our coping capacity, our adaptive capacity. But if we get to two or three degrees Celsius global warming, then I think that's going to be well outside the range of adaptive capacity of most places
But Perkins-Kirkpatrick says that from a climate point of view, these fires were unique as well.
“Black Summer was unprecedented. For example, the types of fires that interact with the atmosphere are called pyrocumulonimbus. We had 30 in that one season alone. And that was as many as we had in the entire three to four decades prior to that,” she says.
“Can you imagine that in the future when it’s hotter and drier and things are just drying out more quickly that could increase again?
“Now, we’ve had a few years without any fires. That’s good. But if we have those types of fires every few years, pretty much all over the country, then we’re going to run out of money, we’re going to run out of resources and no one will be able to insure their houses.”
Asked at what point she believes global warming will reach a point at which societies, and in extension economies, won’t be able to cope, she puts it at only a few degrees from our current position.
“We’ve already seen changes in extremes, a significant change, but in most regions that’s not completely outside of our coping capacity, our adaptive capacity,” she says.
“But if we get to two or three degrees Celsius global warming [compared to pre-industrial levels], then I think that’s going to be well outside the range of adaptive capacity of most places.”
What to Do?
More and more institutional investors are aware the real dangers of climate change are found in the increasing frequency of extreme weather events. As wildfires rip through regions that have never experienced fires before and flash flooding becomes increasingly widespread, the damage from these events is obvious.
Chris Ailman, Chief Investment Officer of United States public pension fund CalSTRS, addressed the issue during an interview with Bloomberg on 19 August, when he acknowledged the fund’s investment strategy had to adapt.
“Extreme weather is now a commonplace event. And I think we have to factor that into our investments as a risk, increased insurance costs,” Ailman said.
“You’re going to see more flight disruptions, more dirty air, more weather extremes, heat and cold, more droughts and rain. And that’s absolutely going to be consistent for the rest of our lifetimes.
“Get used to it and adjust. And that means our investment models have to adjust to the volatility.”
Asked what institutional investors can do to get a more realistic sense of the impact of climate change on their portfolios, Perkins-Kirkpatrick says we need to look at the full range of potential outcomes at certain levels of warming, rather than averages.
The key impact will be in the occurrence of extreme weather events, including heatwaves, heavy storms and prolonged droughts. It is not just the intensity, but also the frequency of these events that will determine how deeply different sectors will be affected.
With weather, there is ultimately variability and a bit of chaos built in that we need to at least try and account for. We can't ignore that. The idea that GDP decreases 10 per cent per degree of global warming or something similar … no, it is not going to be linear. I can pretty much guarantee that
“With weather, there is ultimately variability and a bit of chaos built in that we need to at least try and account for. We can’t ignore that,” Perkins-Kirkpatrick says.
“The idea that GDP decreases 10 per cent per degree of global warming or something similar … no, it is not going to be linear. I can pretty much guarantee that.”
But she is quick to point out current climate science models are not perfect either. One of the key problems is one of scale, she says.
“A lot of these extreme events happen on really fine spatial scales. And a lot of the climate models that we have are good and very useful in a lot of different ways, but they simply don’t go down to the spatial scale that economists and actuaries need,” she says.
“They might need data at the suburb level or even down to the house level. In Sydney, for example, it’s always hotter out west versus the eastern suburbs. If we had a model that ran on five square kilometres resolution or even less, we’d be able to capture that variability so much better.
“And that’s mainly a computational issue. It’s not a physical issue. It’s not an issue in our understanding. We just don’t have the computational power or storage to run them regularly at that resolution to be really useful in that setting.”
She says she would like to see climate scientists and investors work together on developing more granular models and understand what type of data they are after in order for scientists to design their experiments around these requirements.
In an ideal world, climate scientists would develop systems that have a resolution of less than five square kilometres across the entire globe and which would look at variables such as temperature, rainfall, humidity and pressure on a daily basis, preferably even more often.
“That would answer a lot of questions for us. It is still not going to tell us that a severe bushfire is going to occur over the south-east region of Australia on 8 January 2075. We can’t go down to that level,” Perkins-Kirkpatrick says.
“But we would be able to sample the variability around that type of event. We would be more accurate in saying: ‘This is what’s going to happen over south-east Victoria versus the Greater Sydney Basin or the Southern Tablelands.’”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.