Climate Output at Risk

The Journal of Portfolio Management Novel-Risks 2022, Vol. 48, Issue 10

Investors and regulators are increasingly concerned that climate changes, tipping points in particular, pose serious risks for future economic growth.

The authors extend a leading integrated assessment model to incorporate the latest physics and economics findings to study the impact of three emission abatement schedules (BAU, SLOW, and FAST) on economic output over the next 150 years.

The authors find that abating little means betting that tipping points do not exist, or that their threshold temperatures are many degrees above current temperatures. We know from climate science that the odds of this gamble are long.

This article also shows that its payoffs are small. Furthermore, the insurance cost of substantially reducing the impact of tipping points is very low, even for the more aggressive abatement schedules: fast decarbonization delivers considerable benefits in most climate scenarios and, even in the most climate-benign scenarios, only marginally reduces output. Investors who channel their wealth toward abatement-enhancing investments buy cheap insurance for their portfolios.