New report from BCG and Cambridge on climate-change investment

Investment in climate-change mitigation and adaptation to limit global warming to 2°C by 2100 would greatly reduce economic damage, and the cost of inaction is equivalent to 11% to 27% of cumulative GDP, says a report issued today (12 March) by Boston Consulting Group (BCG), Cambridge Judge Business School, and the University of Cambridge’s climaTraces Lab.

The report outlines the strong economic case for investing to limit global warming, the consequences of failure to make such investments, and the fact that this compelling economic case for investment is not well known or understood.

Livelihoods of billions at risk without climate-change investment

“Governments, businesses, and people worldwide are paying the price for the storms, floods, heatwaves, and droughts that are caused by climate change,” says an Executive Summary of the report, which is entitled ‘Too hot to think straight, too cold to panic: landing the economic case for climate action with decision makers’.

“Without investment to avoid future climate change, it’s likely that the world’s economic output will be severely diminished, threatening the livelihoods of billions of people. This report sets out the economic case for climate action – and how we can make it influence decisions today.”

Investing 1% to 2% of GDP would greatly reduce economic damage

If global warming is allowed to reach 3°C by 2100 from pre-industrial levels, cumulative economic output could be reduced by 15% to 34%, the report says, while investing 1% to 2% of cumulative GDP in mitigation and adaptation to limit warming to 2°C from pre-industrial levels would reduce economic damage to just 2% to 4%.

“Rapid and sustained investments in mitigation and adaptation will minimise the economic damages and come with a high return,” says the Executive Summary. “Mitigation slows global warming by cutting emissions; adaptation reduces vulnerability to the physical impacts of climate change. Investments in both must rise significantly by 2050 – 9-fold for mitigation and 13-fold for adaptation. We estimate that the total investment required equals 1% to 2% of cumulative economic output to 2100.

“The return on this investment is compelling. The net cost of inaction – that is, the cost of not addressing climate change after accounting for the investment required for mitigation and adaptation – equates to 11% to 27% of cumulative economic output. Taking the average of this range, the amount is equivalent to 3 times global healthcare spending until 2100 or 8 times the amount needed to lift the world above the global poverty line until 2100.”

Climate change will impact all countries and all sectors

Says Kamiar Mohaddes, Associate Professor in Economics and Policy at Cambridge Judge Business School and Co-Director of the University of Cambridge climaTRACES Lab, and a co-author of the report:

“Research on climate change impacts across all regions and sectors is expanding rapidly. What stands out is that productivity loss – not merely capital destruction – is the primary driver of economic damage. It is also clear that climate change will reduce income in all countries and across all sectors, affecting industries ranging from transport to manufacturing and retail, not only agriculture and other sectors commonly associated with nature.”

Says Annika Zawadzki, BCG managing director and partner, and a co-author of the report:

“The economic case for climate action is clear, yet not broadly known and understood. Investment in both mitigation and adaptation could bring a return of around tenfold by 2100.”