The Impact of Climate Change on the Economy

Of all environmental problems, climate change has long had pride of place. Some businesses may see its impact in terms of taxes such as the Climate Change Levy or opportunities such as carbon trading. But the implications of climate change for business go much wider. What are the essential issues?

First we must distinguish natural from human driven change:

Natural change

• roller coaster of natural variations during the past 60 million years; wobbles during the last relatively stable 10,000 years: farming in Greenland in 10th century, extreme cold in New England in the 16th century, rising temperatures since 1880, and steeply since 1980.
• until recently we believed that all climatic change was slow; now we know otherwise: evidence of cores from Greenland and Antarctic ice caps.

Human-driven change

• Environmental change is accelerating because the human foot is on the accelerator. A periodical visitor from outer space would find more change in the surface of the earth in the last 20 years than he would have found in the last 200, and in the last 200 more than in the last 2,000.
• Since the industrial revolution, we have been using the sky as a waste unit. As a result carbon dioxide in the atmosphere has now reached its highest level in 400,000 years, and is at a third higher than in pre-industrial times.
• Methane, a less abundant but far more effective greenhouse gas has seen its concentration more than double since pre-industrial times.
• Doubters may say that the sun is more active, and that recently there have been more sun spots than at any time for the last thousand years. But the link between sun spots and global warming has not been clearly established, while our understanding of the relationship between atmospheric carbon and global surface temperature is clear.

It is notoriously difficult to distinguish natural from man made processes, but there is a growing consensus, expressed in successive reports from the Intergovernmental Panel on Climate Change, that the human contribution is now having a significant if not decisive effect. Working Group I (Science) of the Intergovernmental Panel concluded in 2001 that

"in the light of new evidence and taking into account the remaining uncertainties, most of the observed warming over the last 50 years is likely to have been due to the [human-induced] increase in greenhouse gas concentrations".

According to the World Meteorological Organization (WMO), 2003 is likely to have been the third warmest year on record. The warmest year ever was 1998, and the second warmest was 2002. The WMO has stated that late 20th century warmth is unprecedented for at least the past millennium, and in the Northern Hemisphere, the 1990s were the warmest decade and 1998 the warmest year in the past 1,000 years.

What would a warmer world look like? Here the uncertainties, region by region, multiply. Efforts have been made by Working Group II (Impacts) of the Intergovernmental Panel to assess possible impacts by continent, but the results are inevitably sketchy. However interpreted, they suggest a different world and a correspondingly different distribution of human activity as people and the living organisms on which they depend try to adapt to change. Such change includes new patterns of rainfall and drought, more extreme events, and rising sea levels.

On a global scale effects include:

• Impacts on all natural ecosystems.
• Impacts on water resources, and in particular increased stresses in many poor countries.
• Impacts on food supplies. There will be increased crop yields in high and mid-latitudes countries, but decreased yields in lower latitudes.
• Impacts on human health. Micro-organisms respond rapidly to changes in temperature and moisture. Old diseases such as malaria could return and new diseases could arise.

Then there are the jokers in the pack. They relate to negative and positive feedback. For example there is a possibility that an increase in fresh water in the North Atlantic & Arctic Oceans, caused by melting ice and increased river flow, may weaken the powerful current - the Gulf Stream or N. Atlantic Conveyor - that brings warmth to Western Europe and points East. There are already indicators that this process, which happened some 12,000 years ago, may already have started. Thus warming may paradoxically produce cooling.

There is the other possibility that the melting of tundra and warming of the oceans may lead to the release of vast quantities of methane. This is a powerful greenhouse gas, and global temperatures could rise as a result. This enhanced greenhouse effect has also happened in geological history, notably ate the end of the Palaeocene epoch some 55 million years ago.

At present the Inter-Government Panel tends to discount either possibility. But no one knows where the thresholds are. In simple terms the current trends is demonstrably towards warming.

Impacts in Britain

In Britain the Government has made more detailed predictions under its Climate Impacts Programme. It is recently produced its second set of scenarios for future impacts here. Our climate will become warmer, the average annual temperature may rise by between 2°C and 3.5°C by the 2080s. There will be greater warming in the south and east rather than in the north and west. High summer temperatures will become more frequent, whilst very cold winters will become increasingly rare. A very hot August, such as experienced in 1995 when temperatures over England and Wales averaged 3.4°C above normal, may occur one year in five by the 2050s and as often as three years in five by the 2080s.

At the same time, winters will become wetter and summers may become drier throughout Britain. In the south and east, summer precipitation may decrease by half or more by the 2080s and winter precipitation may increase by up to 30%. Though perceptions can deceive, and bad planning can play a part, cases of flooding seem ever on the increase. By the 2080s, heavy winter precipitation intensities that are currently experienced around once every two years, may become between 5% (Low Emissions) and 20% (High Emissions) heavier.

Relative sea level will continue to rise around most of our shorelines. By the 2080s, sea level rise may between 260 mm and 860 mm above the current level in southeast England. Here the problem is confounded by another factor: that of isostatic change. Since the last ice age much of southern and eastern Britain has been sinking, and northern and western Britain have been rising in relation to sea level.

These changes, if they happened, and still more the combination of them, would have widespread effects on our society and its economy. Let me suggest a checklist. They would include:

• water supply and distribution, with new lakes and reservoirs;
• agriculture and forestry with different crops;
• ecosystems generally with new distributions of insects and micro-organisms;
• human health;
• increased numbers of refugees and movement of people generally;
• business and industry, with new networks of road and rail;
• insurance and banking;
• character and location of cities, towns and villages;
• buildings and architecture.

El Nino events offer just the smallest glimpse of the havoc that variations in climate can bring about.

International Responses

Not surprisingly, the scale of such changes have brought the world together as no other environmental hazard could have done. Governments have realised the need to work together in a succession of events:

• World Climate Conferences 1979 and 1990
• Intergovernmental Panel on Climate Change (IPCC) Reports of 1990, 1995, and 2001. Its Fourth Assessment Report is due in 2007.
• Following from the work of the IPCC, one of the main achievements of the Rio Conference was the Framework Convention on Climate Change. Its broad objective was to stabilize "greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system".

How this should be done has been discussed at nine successive meetings of the parties to the Convention. Recent meetings have concentrated on the implementation of the Kyoto Protocol agreed in December 1997. This committed thirty-eight industrial countries, including the United States, to a global carbon dioxide emissions reduction target of 5.2% by 2008-2012.

The sixth meeting or Conference of the Parties in Bonn reached agreement on the ratification of a watered down Kyoto Protocol, but now without the United States. The seventh settled some of the details of the implementation mechanisms. The eighth set in motion the process of making more stringent targets for the second commitment period. The last meeting took place in Milan in December last year where much time was spent discussing the controversial role of forestry in the Protocol's clean development mechanism. Despite wilful US ignorance and Russian prevarication, the process still has some momentum.

Until recently the rest of the world, including India and China, regarded the problem as one for the industrial countries. But increasingly such countries realize how much their own future welfare is involved. China, with its massive population is predicted to overtake the United States as the world's largest CO2 emitter. The Chinese claim to have reduced their carbon emissions in real terms over the last five years.

All this may look positive. But even if the Kyoto commitments were met (itself highly doubtful), greenhouse gas emissions would still be some 30% up on 1990 by 2010. Thus it is no more than a first step. But even that has not been taken by the biggest polluter of all. The United States, with less than 5% of the world's population but around 24% of its greenhouse gas emissions, is a major villain of the piece. It unwillingness to accept binding treaty obligations is not new. With American society still based on cheap energy (gasoline prices are still lower than bottled water) and vested interests being close to the heart of the current US Administration, it is no surprise that President Bush has refused to ratify the Protocol. A combination of individual US states, from California to New England, has however decided to take up a variety of steps to reduce carbon emissions.

The European Union countries, including our own, ratified the Protocol in New York on 31 May 2002. The European Union has an overall emissions reduction target of 8% below 1990 levels during the period 2008-2012. As part of the European Union basket, and because of its historical record of emissions, the British Government has adopted a legally binding target of reducing its emissions by 12.5%. But experts believe that global warming is proceeding even faster than was first thought when the Kyoto Protocol was first signed. Thus the Government has also adopted a voluntary target of a 23% reduction by 2010.

British Government Measures

The means adopted to achieve this target will depend upon business. Energy use and energy production are areas of obvious interest. The Government's recent Energy White paper may have been short on mechanisms, and avoided the nuclear issue, but it did adopt the Royal Commission on Environmental Pollution 60 % target emissions reduction target for 2050. Energy related measures include:

• The climate change levy which was designed to encourage business to use energy more efficiently. This entered into force on 1 April 2001 and is more of an energy tax than a carbon tax.
• A target to double energy generation through Combined Heat and Power of at least 10,000MW by 2010.
• Increase in public money available for energy efficiency and fuel poverty programmes.
• A requirement for electricity suppliers to meet a target of delivering 10% of supply from renewable sources by 2010.
• An integrated transport policy using, for example, road user charging and workplace parking levies. Businesses can also set up corporate travel plans and car-sharing schemes for employees. The effectiveness of these measures may well be limited by the perilous state of the wider transport system.
• A new waste strategy to reduce reliance on landfill and cut methane emissions.
• A voluntary carbon dioxide emissions trading scheme launched in London on 2 April, 2002. There are currently 32 direct participants and all but one were in compliance at the end of the scheme's first year. However, the scope of the British scheme is limited as it does not apply to energy producers.

Other linked areas which will affect business include overlaps with the Integrated Pollution Prevention and Control scheme and the use building regulations to reduce carbon dioxide emissions.

The European Union Emissions Trading Scheme

The biggest change on the horizon is the European Union's Emission's Trading Scheme which will come into effect on January 1 2005. It is much wider than the British scheme, the Secretary of State for Trade & Industry, Patricia Hewitt, has said that it will become the central plank of the Government's emission reduction policies.

European Union Member State governments will be required to set an emission cap for all installations covered by the scheme. This cap will gradually be reduced. The European Union Emissions Trading Scheme will for the first time impose requirements on the largest individual emitters of carbon dioxide to monitor and account for their emissions. The installations covered include: the electricity generation industry; oil refineries; the iron and steel industry; the minerals industry; paper, pulp and board manufacturing. Together the installations covered by the scheme account for about 50% of all British carbon dioxide emissions.

Increased awareness

So much for Government schemes. In some respects businesses are ahead of government and the need for new thinking is fairly well recognized. The Woodhouse Group is a good sign of this.

Modern economies are going through a period of radical change: away from energy intensive and heavy manufacturing activities towards service industries, scientific enterprise, and information technology. There is much wider awareness of environmental issues in general. Recent years have seen a trend towards greater corporate responsibility, realized through self-regulation, corporate environmental policies, voluntary codes of practice, and the use of environmental audits and open reporting.

An international survey found that the number of companies with environmental or health, safety and environment reports increased to 24% in 1999. As a consultant to environmental and ethical trusts, I have seen a remarkable change in corporate as well as shareholder attitudes in this respect, all with good effects on profitability and share value. Companies include sections on the environment in their annual reports, and publish environmental impacts assessments.

Technology

Then there is the technological fix. It is business that drives technology and makes good ideas happen. But technology is often a double-edged sword, throwing up unexpected consequences, sometimes far graver than the problems than the difficulties they were meant to resolve. Chlorofluorocarbons or CFCs, come to mind. Seemingly harmless, they are both a major cause of the ozone hole a powerful greenhouse gas.

Technology has a major part to play. Technology has helped pioneer cleaner production systems under the rubric of industrial ecology, which aims to reduce or eliminate toxic pollution and waste generation. Cleaner production has proved popular in industry, at least partly because the costs of this approach tend to diminish over time, while the costs of controlling pollution and cleaning up after the event become increasingly high as new regulations are introduced.

Despite progress there is often a gap between the environmental concern and performance of leading multinationals and large companies, and that of small and medium-sized enterprises (SMEs). The largest companies have both the resources to invest in environmental action and the visibility to motivate such action. But small companies operate with very limited resources on short time horizons, and are often struggling even with things as they are.

But the trend is inexorable, whether at international level, for example through the International Chambers of Commerce or the World Bank; or at national level, for example in Britain through the Advisory Committee on Business and the Environment (ACBE) and the Confederation of British Industry.

Costs

Some businesses may not respond to climate or wider environmental issues. In my view they will find it more difficult to:

• sell their products. Green consumerism is ever more powerful. As consumers become more aware of which businesses are failing their emissions targets, sales might suffer. The public's response to Brent Spar and the Exxon Valdez catastrophe can offer telling lessons.
• dispose of waste. There is a shortage of good landfill sites, incineration is ever more expensive, and in Britain a landfill tax is driving up the costs. We are far behind such countries as Germany in reducing production of waste (for example through packaging) and in disposing of it afterwards.
• obtain insurance. Liability legislation will mean insurance companies will require environmental audits before providing cover.
• attract finance. Investors are becoming wary of bad environmental practice because it can increase costs and risks; regulations specifically covering disclosure of environmental matters as part of stock exchange filings are on the increase.
• recruit and retain able staff. Employees want to work for clean, safe, caring and innovative companies, and their creativity and enthusiasm can be harnessed for the benefit of the company if they are kept informed and involved in improving environmental performance;
• keep within the law. The trend in legislation is to make business far more accountable for its impact on the environment. Pressure on company directors is particularly acute in the United States, given that law can render them personally liable for environmental wrong doing.

Public Understanding

Business is at the core of our society. We could discuss for many hours whether business merely supplies the consumer demands or whether marketing persuades us to buy goods that in many cases we simply do not need. The answer probably lies somewhere in between. Either way the public can influence business in the type and quality of products it demands. New technologies also need informed consumers. Demand for technology must mean more than new and better gadgets. Fridges, washing machines and cars are among many products being labelled to enable us to make better environmental choices.

If governments, business or any other sector is to succeed in reducing its impact on climate there must be a wider recognition in society for the scale of the changes that are needed. We do not want a repeat of the 2000 fuel protests, though it is clear the issue was badly mishandled by the government. Every individual must feel that he and she can do something and take increased responsibility for their actions.

We simply have to change our ways. That means the world as a whole. I don't like to think what future generations will think of us as they pay for the consequences of our actions or inactions.

Change usually takes place for three main reasons:

• First we need leadership from above by institutions or individuals. By that I mean leaders who go in the right rather than the wrong direction.
• Secondly we need public pressure from below. The voice of civil society must be heard, especially at election time.
• Lastly - I am sorry to say - we often need some useful catastrophes to jerk us out of our normal inertia; big but not too big; small enough but not too small; quick but not too quick; slow but not too slow. In each case big enough to demonstrate the point.

I remember that before the Rio Summit of 1992 George Bush senior tried to reassure the American people by saying that no-one was going to change the American way of life. He was dead wrong. North Americans must change their way of life, as we in Europe must change ours. Otherwise Nature will do what she has done to over 99% of species that have ever lived, and do the job for us.