ECONOMY:

Risk experts see climate change as one of the world's biggest business threats

Risk experts are concerned that the twin threats of economic upheaval and accelerating climate change could collide over the next decade, delaying crucial adaptation efforts while exposing nations to unpredictable financial loss from disasters.

The World Economic Forum describes this "super storm" of risks as a top hazard to the global economy through 2022 as world and corporate leaders prepare for an annual summit in Switzerland later this month. Tougher resilience will be a key theme -- not only for assets like electric power networks, but also for the economy -- following years of punishing catastrophes.

The business group points to a dangerous intersection of rising risk and a declining ability to counter it. Ever-denser cities worldwide are increasingly threatened by natural hazards as higher temperatures exacerbate drought, storms and heat waves.

At the same time, anticipated economic tremors threaten to reduce investments in climate adaptation -- a longer-range benefit that's difficult to justify during troubled financial periods. The 80-page report on risks is the result of surveying about 1,000 experts worldwide.

"The narrative emerging from the survey is clear: like a super storm, two major systems are on a collision course. The resulting interplay between stresses on the economic and environmental systems will present unprecedented challenges to global and national resilience," the report says.

It warns that global mean temperatures could rise by as much as 7 degrees Fahrenheit above the start of the industrial period by 2060 if global efforts fail to reduce greenhouse gases. That means future catastrophes could inflict sharper tolls than those witnessed recently, including $125 billion in damage from Hurricane Katrina in 2005, about $70 billion from Superstorm Sandy in October and 35,000 deaths from the European heat wave in 2003.

"This would likely lead to negative impacts including an increase in the frequency of high-intensity tropical cyclones, inundation of coastal cities as sea levels rise, and increased drought severity in several regions," the report says, describing unmet mitigation goals. "Together, the effects would not only mean significant economic losses but also mass displacement of populations, rising food insecurity and aggravated water scarcity."

Delays 'making it more expensive'

Experts from the insurance industry and academia say the "interconnected" nature of economic and environmental risks could amplify the hazards if adaptive measures are not pursued. Failing to invest soon in longer-range benefits, like stronger infrastructure, stands to increase the toll of disasters, David Cole, chief risk officer with Swiss Re, said in an event unveiling the report.

"By delaying action, we are not actually avoiding the problem but making it more expensive, in terms of [financial loss] and lives," Cole said.

That could fuel a damaging feedback loop. As more homes, businesses and municipalities suffer disaster losses, it will put pressure on federal governments to spend more money on recovery efforts. That could create a moral hazard by signaling to the population that it is safe to build in peril-prone areas, like on coastlines and along inland shorelines, some experts say.

Those behaviors can be changed by replacing taxpayer-provided disaster funding with appropriately priced insurance and by minimizing damage through bolstered infrastructure investments, said John Drzik, CEO of the Oliver Wyman Group, which provides risk management consulting.

"We see a number of things that can be done, but we don't see them being done at the speed we need to," he said.

Runaway warming and 'rogue' experiments

Erwann Michel-Kerjan, managing director of the Wharton School of Business Risk Management and Decision Processes Center and a contributor to the report, said population shifts toward dangerous coastal zones could be slowed by attaching requirements to federal disaster aid.

A community, for example, might have to strengthen its building codes as a condition for receiving federal help. Or a homeowner might have to rebuild in a safer place. That reduces moral hazard while protecting federal investments in rebuilding.

"We have this technology," Michel-Kerjan said in an interview. "We know how to make a house more secure or more resilient to flooding. That's not rocket science."

The World Economic Forum report points to five of the 50 biggest risks identified by experts worldwide. Two of them are related to climate change: the threat of rising greenhouse gases and crises from water supply challenges. The other three are severe income disparity, chronic fiscal imbalances and mismanagement of the world's aging population.

The report also takes a leap to explore five potential "X factors" that could rattle society, but which the authors acknowledge are "somewhat remote." These "emerging game changers" include "runaway climate change," the "rogue" deployment of geoengineering technologies to manipulate the climate and discovery of alien life.

The runaway climate theory is based on the notion that feedback loops, like the emergence of darker areas of the Earth from melting snow and ice, could have a much greater, and faster, impact on global warming than scientists commonly predict.

"They have the potential of amplifying climate change to a point of fundamentally disrupting the global system," the report says of feedback loops. "The much-debated questions are where these tipping points lie, how soon they might be reached, whether they can be predicted -- and what will happen when they are crossed."

Want to read more stories like this?

E&E is the leading source for comprehensive, daily coverage of environmental and energy politics and policy.

Click here to start a free trial to E&E -- the best way to track policy and markets.