Expertise Publications on climate change

In 2021, Swiss Re Institute published two Expertise Publications on climate change: “The economics of climate change: no action not an option” and “The insurance rationale for carbon removal solutions”.

The first of these, published in April, assesses the expected impact of rising global temperatures on GDP across the world. Recent scientific research indicates that the current trajectory of temperature increases – accounting for existing mitigation pledges – is pointing to global warming of 2.0 – 2.6°C by mid-century. Our study has taken this as its baseline to simulate climate change impacts over time but, uniquely, has also modelled for uncertainties around possible physical outcomes. Applying this method, it presents expected outcomes for three different climate change scenarios:

• In the baseline 2.0 – 2.6°C scenario, by mid-century global GDP will likely be 11 – 14% lower than it would be in a world without climate change (0°C change).
• If, however, the Paris Agreement target of limiting global warming to well below 2°C, preferably to 1.5°C is met, global GDP loss by mid-century is expected to be much lower, at 4.2%.
• Finally, in a severe no-action scenario of a 3.2°C temperature increase, global GDP loss could amount to 18%.

To assess the implications for individual countries, the study uses a Climate Economics Index that incorporates the economic impact from gradual climate change, vulnerability to extreme weather events and current adaptive capacity. This analysis shows that many emerging markets, but especially those in Southeast Asia, are particularly vulnerable because they are heavily exposed to climate change risks but lack the resources to adapt.

The study concludes by stressing that taking no action is not an option and that achieving the targets under the Paris Agreement remains the most desirable outcome. Coordinated global policy action is required, in particular to ensure equitable progress across diversely affected countries. Key challenges include more policy action on carbon pricing, incentivising nature-based and carbon-offsetting solutions (see the second publication described below), and international convergence on definitions of what counts as green and sustainable investments.

The second of these Expertise Publications appeared in July and focused on the role re/ insurers can play in advancing carbon removal solutions. To limit the rise of global warming to well below 2°C and preferably to 1.5°C, in line with the Paris Agreement, the world’s greenhouse gas emissions must fall to net zero by 2050 and remain net negative through the second half of the century. This means that huge amounts of emissions will need to be removed from the atmosphere.

At present, however, the carbon removal industry is still in its infancy and is facing barriers to its growth along the entire value chain. On the supply side, there is no economic incentive due to the absence of universal carbon pricing, but there are also practical constraints such as high costs and a lack of the expertise required. Furthermore, the marketplace is as yet undefined and unregulated. And on the demand side, the high costs are resulting in a first-mover problem.

Such issues are typical of a market in its early stages of growth, and stringent climate policies will be needed to overcome them. However, the publication argues that the private sector can do a lot to help accelerate the development of the carbon removal industry.

The re/insurance industry, in particular, is ideally placed to make a tangible contribution. It can do so in three ways: by de-risking carbon removal services; by providing financing to developers and projects though their asset management activities; and by purchasing carbon removal certificates to balance their own operational footprints, thus creating early demand. The publication goes on to explore how re/insurers can best use these three levers to have a positive impact.

Swiss Re Institute also organised two events in connection with the topics addressed in the two publications.