The cost of inaction is far higher than the cost of adaptation to climate change

During the Climate Futures event held in early November at the Maison de la Mutualité, AXA gathered experts to discuss climate change adaptation. Let's review the analysis Gilles Moëc, AXA Group Chief Economist, presented regarding the impact of climate change on the economy and the considerations for designing adaptation strategies within companies and territories.

What are the effects of climate change on the economy and how are they measured in global indicators?

The costs of climate change are increasing due to the rising frequency of extreme weather events, and the impending disruptions in global supply chains and the obsolescence of installed capital, when buildings are no longer adapted to new temperatures, for example. Often, the economic cost of climate change is first insidious then dramatic.

Insidious at first because we cannot directly measure to what extent climate events impact the economy. For example, the GDP, the key indicator used in economics, does not measure the actual cost of climate change. It only reflects production flows. Let's take a very concrete example. When natural disasters occur, after a temporary production shutdown at the affected locations, economic actors (insurers, states, etc.) release funds to finance repairs to put into place new production flows. However, none of the capital destruction these climate events cause is integrated into the GDP calculation. This means that, after a year, a natural disaster may even end up having a net positive effect on the GDP. From this point of view, we must commend the innovative work of INSEE, which has just produced indicators that, for France, will more effectively integrate the cost of climate change into the measurement of the economy.

In addition, with the frequency of natural disasters increasing, insurers may have to raise their premiums. This could result in affecting households' purchasing power and states having to incur additional expenses financed either by taxes or public debt. All these costs would ultimately slow down growth.

In the long run, the cost of inaction will become enormous and far higher than the cost of adaptation to climate change. We must be aware of the existence of the non-linearities, of tipping points beyond which an activity is likely to collapse. A concrete example is the acidification and temperature increase of the oceans that threaten to collapse the entire fishing industry. Another is regions where climate change could make office work in cities unbearable in even just 20 to 30 years. Existing activities could become obsolete.

How can economic actors adapt to climate change and at what cost?

We need to raise awareness among economic actors. The first steps in the adaptation process are informing and educating all stakeholders to climate change risks.

Companies and territories must anticipate the potential consequences of climate change and devise ways to adapt operational and commercial models in a warming world. Adaptation is crucial and complementary to decarbonization.

To make our assets more efficient, less energy and carbon intensive in the automotive industry for instance, innovation is part of the solution. But we also need to rethink models in certain sectors such as agribusiness. In France, the government has just launched the third national plan for adaptation to climate change, a major consultation with companies on the measures to implement to safeguard and secure their activities and working conditions in a scenario with +4°C by 2100.

Adaptation comes at a price. While we can evaluate the costs associated with the transition (through carbon emission taxes, identifying activities that will be obsolete in 15 years, etc.), it is far harder to measure the cost of adaptation.

What role can financial institutions play in the fight against climate change and in adaptation?

Finance should serve sustainable growth. Financial institutions have a key role to play, particularly through their investments: by supporting sustainable sectors and projects (impact funds, etc.), and also by discouraging investments that fail to align with sustainability.

But we must embrace a certain complexity. One of the disservices that sustainable finance could do to the fight against climate change would be to operate in an fully binary manner. For example, completely withdrawing from certain sectors, even though within these sectors, some companies still have brown activities but are also seeking and offering technical decarbonization solutions. Supporting the transition means, in some cases, accepting to retain assets in portfolios that are not yet entirely green.

Financial institutions cannot achieve this alone. Public authorities and regulators must support adaptation through fiscal incentives and by defining regulatory frameworks.

The current geopolitical context forces economic actors to navigate in an increasingly fragmented world. In light of the results of the American elections, how do you think climate and economic challenges will evolve?

Global geopolitical instability hinders cooperation on regulations, particularly in finance, leading to a return of trade barriers worldwide. Donald Trump has proposed raising import duties to 10%, with a special rate of 60% for China.

The risk of deglobalization, or rather the clubification of a global economy, would fragment the economy around competing, or even hostile poles instead of uniting around common political interests.

This fragmentation is also noted in climate agendas. Donald Trump has clearly indicated that he would withdraw the United States from the Paris Agreement. What is striking is that faced with a common risk - the disintegration of the global financial system during the 2008 crisis - states of all political persuasions, often rivals, cooperated to achieve common solutions, including financial regulations that converged significantly across different regions. The G20 was the epitome of this collective effort. Today, this spirit of cooperation, despite all the COPs in the world, is absent.

Nonetheless, we must not despair. Even under Donald Trump's first presidency, the US economy reduced its carbon intensity. Many American companies will not relent, even if they may be less vocal on these issues. The pressure from consumers, NGOs, the simple awareness, at all levels, of the urgency to act is progressing, beyond political upheavals.