The Economics of Climate Change Mitigation & Adaptation

What Needs to Happen

We know that the next 10-15 years will be exceptionally crucial in meeting the IPCC's temperature recommendations.[1] This involves radical changes to the way we generate power, yes, but it also means acting sustainably in a myriad of other ways—forest conservation; reducing air, land, and water pollution; preserving or boosting endangered species populations. All of these should and need to be included in how we approach sustainability across the economy.

All of these projects and programs require some capital expenditures, the least of which being to simply transition from two different models of governance within businesses. However, the central aspect of combating climate change is infrastructure investments. In an environment where the governments of the world recognize the severity of climate change and act accordingly, the private sector and investors are poised to profit greatly.

Above are four different pathways in which the world could transition to carbon emissions inline with the IPCC's recommendations (figure i)

Positioning Oneself to Profit from Climate Change Mitigation

There are a series of reasons why focusing on sustainability is beneficial for companies, both presently and in the future. Focusing purely on the short-term, there is clear evidence that companies which focus on sustainability "have a lower cost of capital in terms of debt (loans and bonds) and equity" due to the perceived reduction in risk and exposure.[2] This is largely due to how sustainable companies do not have to spend capital transitioning themselves into being more sustainable when facing strict environmental regulations and firm deadlines.[3] Sustainability is also beneficial to a company's image, bringing in so-called "green investors" and attracting sustainability-focused consumers.[4][5] Investors, even excluding sustainability-centered ones, also look favorably on companies with a "first mover advantage," increasing the expected "stock return potential."[6]

In regards to the long-term, a low-carbon policy program "could deliver a direct [global] economic gain of US$26 trillion through to 2030 compared to business-as-usual" through government spending fueling economic growth and increased worker productivity relative to our current path.[7] Clean-energy subsidies are also going to be a central focus of any government's plan to combat climate change, and that means companies can and should focused on rapid growth within green industry sectors.[8][9]

Areas of New York City that are Projected to be Underwater if Ocean Levels Rise by 6ft (figure ii)

And if that is not enough, this is all surrounding the economic growth of a low-carbon pathway—it is not looking at the economic contraction under the effects of our current plans. The capital behind relocating facilities and headquarters away from the coast (see above, figure ii), higher healthcare premiums particularly for workers in outdoor settings, and the costs of adapting current operations to a new climate are guaranteed to be massive.[10] This is not an issue to be dealt with down the road either. Companies are already having to contend with the effects of climate change: aerospace companies "'lightweighting' some of their machines to adapt" to 119°F Arizona heat; agricultural companies purchasing more acres of land to offset the effects of droughts.[11]

What Companies and Investors Should Do

First, companies need to set definitive goals and enact programs to reach said goals.[12] These programs must "be accompanied by metrics that can track and measure [the] progress" of the programs.[13] Ideally, these goals would be encapsulated in reducing a company's carbon emissions along with other resource usage and pollution.[14] This is also inextricably linked to the environmental impact of a company's suppliers (see right, figure iii). Many companies already have sustainability reports that they deliver to investors, but those need to be accompanied by strong visions of sustainability with achievable yet ambitious timelines.[15]

Climate change and its effects also means companies should be examining areas of risk and work to build up resiliency in those areas.[16] We know the costs are guaranteed to be severe, and adapting now could mean money saved in the future. No matter how much a company thinks it is insulated from the effects of climate change, it needs to be building up a tolerance in its current and future operations if and when environmental conditions change.[17] Paired with that is, naturally, a reduction in emissions—companies do face risk exposure due to climate change, and the best way to lessen that future risk is to reduce carbon emissions in the here and now.[18][19]

As for investors, demanding sustainable practices has to be a given moving forward. Groups of "green investors" have been proven to hold significant impacts on the practices of the companies they invest in, and such investments, as has been said above, are much more likely to produce higher returns compared to companies lacking such a vision.[20]

The aftermath of mountaintop removal mining in the coal industry (figure iii)

Rooftop Solar Panels Getting Installed (figure iv)

Sources:

The New Climate Economy, "The 2018 Report of the Global Commission on the Economy and Climate," The New Climate Economy, last modified 2018, accessed May 13, 2019, https://newclimateeconomy.report/2018/.
Deutsche Bank Climate Change Advisors, "Sustainable Investing," Deutsche Bank, last modified June 2012, accessed May 13, 2019, https://www.db.com/cr/en/docs/Sustainable_Investing_2012.pdf.
Deutsche Bank Climate Change Advisors, "Sustainable Investing," Deutsche Bank.
Ibid.
Telukuntla and Niemczyk, interview by the author.
Deutsche Bank Climate Change Advisors, "Sustainable Investing," Deutsche Bank.
The New Climate Economy, "The 2018," The New Climate Economy.
U.S. Global Change Research Program, FOURTH NATIONAL CLIMATE ASSESSMENT.
Telukuntla and Niemczyk, interview by the author.
U.S. Global Change Research Program, FOURTH NATIONAL CLIMATE ASSESSMENT.
Barron, "How Big Business," The New York Times Magazine.
Robert Kuhn, "Public and Private Environmental Policies," e-mail message to author, May 22, 2019.
Robert Kuhn, "Public and Private," e-mail message to author.
Ibid.
Ibid.
Ibid.
Ibid.
Ibid.
Meyer, "How to Understand."
Deutsche Bank Climate Change Advisors, "Sustainable Investing," Deutsche Bank.

Figures:

IPCC, Characteristics of Four Illustrative Model Pathways, photograph, Special Report: Global Warming of 1.5°C Summary for Policymakers, 2018, accessed May 14, 2019, https://www.ipcc.ch/site/assets/uploads/sites/2/2018/10/SPM3b_29102018-724x1024.png.
Jason Lee, Underwater Coastline, photograph, New York Magazine Intelligencer, September 7, 2016, accessed May 24, 2019, http://nymag.com/intelligencer/2016/09/new-york-future-flooding-climate-change.html.
Kent Mason, Mountaintop Removal Mining, photograph, Appalachian Voices, 2017, accessed May 24, 2019, http://appvoices.org/end-mountaintop-removal/.
Sergio Flores, Warming Investors' Hearts, photograph, Bloomberg Opinion, May 15, 2019, accessed May 24, 2019, https://www.bloomberg.com/opinion/articles/2019-05-15/clean-energy-beats-the-market-as-trump-touts-fossil-fuels.

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