/ 7 June 2021

Climate change will hit G7 economies harder than Covid, research finds

Drought damage: Droughts in the past two years have made the poor even more vulnerable because food prices rise and they cannot depend on their own crops for sustenance.
AI can improve weather predictions, improve carbon capture solutions, make transportation more efficient and less detrimental to the environment. (Paul Botes/M&G)

Economies of the G7 nations could see an average loss of 8.5% of total economic value a year by 2050 if leaders do not take more ambitious action to tackle climate change, according to research.

Oxfam analysed recent research by the Swiss Re Institute to show that G7 nations stand to experience double the GDP losses than those of the Covid-19 pandemic, which caused the G7 economies to shrink by an average of 4.2%. 

“While economies are expected to bounce back from the short-term effects of the pandemic, the effects of climate change will be seen every year,” Oxfam notes.

The Swiss Re Institute research shows that the world stands to lose almost 10% of total economic value by 2050 if climate targets are not met. In the worst-case scenario, global GDP could shrink by 14% by 2050. 

If the Paris Agreement target of well below 2°C warming is met, the anticipated mid-century global GDP loss could be prevented, according to the research. 

Oxfam released its analysis of the research ahead of the meeting of the G7 countries this week. During the summit, leaders of the G7 countries — the UK, the US, Japan, Canada, France, Germany, Italy — will discuss matters of global importance, including Covid-19 recovery and climate change.

Climate change affects economies systemically through physical and transition risks. Physical risks are caused by damage to property resulting from extreme weather events linked to climate change. Transition risks reflect the global move towards less carbon-intensive activities and the effect this could have on economies that fail to keep up.

According to the Swiss Re Institute research, the effects of climate change on economies will accelerate and accumulate over time.

The economic effects of climate change will happen in two phases, the research notes. First, countries will maintain similar GDP growth rates as in the past and emerging economies will continue to catch up with advanced markets. But with temperatures slowly rising, the economic effects will start to become more noticeable, especially in more exposed regions. 

A second phase of slowdown in real GDP would start from about 2050, with the effect in terms of reduced economic growth becoming more pronounced in the second half of the century, according to the research. 

“With the possibility of tipping points being triggered, such as the melting of ice caps or biosphere collapses, leading to irreversible change in climate systems, the tail risks of catastrophic economic impacts would become even more pronounced towards the end of the century or later.”

The Swiss Re Institute research suggests that many advanced economies in the northern hemisphere are least vulnerable to the overall effects of climate change, being both less exposed to the associated risks and having better resources to cope. The US, Canada and Germany are among the top 10 least vulnerable. 

The Swiss Re Institute’s climate economics index ranks South Africa among the most vulnerable economies, with a score of 28.4. Finland is the least vulnerable, with an overall index of 11.3; Indonesia is ranked the most exposed economy, with an index of 39.2. 

South Africa is particularly exposed to transition risks because of the high carbon intensity of many domestically produced goods. 

The country’s financial institutions that have invested in, or lent to, industries exposed to transition risks could incur losses if global demand for these goods declines sharply. The government is also exposed to a large share of transition risks, considering its high investments in state-owned coal-fired power plants and rail facilities designed to transport fossil fuels.