Yves here. A compelling report by British actuaries warns that the economic impact of climate change is far more severe than most economists forecast, with a 50% of GDP reduction forecast starting in 2070. We’ve embedded their analysis at the end of this post.
The problem with 2070 is that is too far out to motivate money mavens, since anything that happens beyond a 10 or 15 year horizon has close to zero impact in a net present value model. Stock prices reflect earnings expectations out at most to 18 months. Other experts have opined that potable water and food supplies will become critically scarce in many parts of the world by 2040. If that happens, expect an intensification of mass migration, conflicts, and government/social breakdown in the afflicted regions. In other words, events that will harm investible wealth look set to kick in not that far down the road.
The Los Angeles fires are putting an intermediate question front and center: how much will governments try to and succeed at socializing risks in the interest of trying to preserve the status quo? The problem, as some are starting to point out, that risks of this scale are not insurable. Consider that Los Angeles soil reached the driest level it has been at in 150 years. Combine that with the US affinity for wooden single family homes, typically with shrubs and trees.
Combine that with an issue yours truly had not thought about much heretofore: prevalent fire codes. Admittedly these are highly variable across the US. And my understanding is that they nearly always grandfather older buildings, as in potential fire traps. Needless to say, per a recent tweetstorm that Lambert posted, the usual priority is to make sure the building has features such as fire alarms, fire escapes, and emergency lights and for many structures sprinkler systems and fire doors, to give the people inside a good chance of escaping. Some also place restrictions on the materials so as to reduce flammability.
But as far as I can tell, devising structures that will survive fires, as opposed that enable people to survive them, is seldom required. That become a big problem when those structures have become a large part of the wealth of households in advanced economies, as well as providing collateral for one of the big lending categories, residential and commercial mortgages (admittedly steel and concrete are the main materials in commercial building, so the fire downside is vastly less acute). And as is now coming into focus in California, there will almost certainly be some sort of government funding of payouts to insured and burn-out homeowners, since the insurance losses are expected to exceed what private insurers are prepared to bear plus the mere $400 million reserves in the California state fire insurance scheme.
Governor Gavin Newsom is now trying to get out in front of the rebuilding issue. I’m doubtful his ideas will get very far, given that his and Los Angeles Mayor Karen Bass’ political capital is about zero.
They are going to turn Altadena into one gigantic apartment complex.
“As we start rebuilding, starting to relax some of the zoning laws, especially in a more working class neighborhood like Altadena. So that rather than putting up single-family residences, we could allow… pic.twitter.com/O5EnB2njra
— Kevin Dalton (@TheKevinDalton) January 15, 2025
Note that his mention of the Olympics and housing in close proximity is sure to engender pushback from the right wing, which holds the pursestrings in Washington and may gain more influence in California as moneyed homeowners in Los Angeles seem to be turning not just on Newsom and Bass, but the Dems generally. The Olympic Village was derided as a green experiment gone bad. A representative story from Deseret News, ‘Living in the Olympic Village makes it hard to perform’: Athletes are complaining about their accommodations in Paris:
The Olympic Village is not air-conditioned. It instead relies on a water cooling system that much of Europe already uses. Temperatures in Paris have already surpassed 90 degrees Fahrenheit during the Games, driving athletes from some countries, including Canada, Italy and Denmark, to use portable air conditioning units….
American tennis player Coco Gauff’s TikTok video showing how 10 athletes shared two bathrooms in her part of the Olympic Village went viral.
Other reports from athletes complained of poor water supplies and even issues with the hygiene in the bathrooms (not clear if due to the overcrowding per above or plumbing).
But he is believed to be advocating for multi-family housing in the middle-class Altadena, where many of the homes had been inherited rather than purchased:
They are going to turn Altadena into one gigantic apartment complex.
“As we start rebuilding, starting to relax some of the zoning laws, especially in a more working class neighborhood like Altadena. So that rather than putting up single-family residences, we could allow… pic.twitter.com/O5EnB2njra
— Kevin Dalton (@TheKevinDalton) January 15, 2025
Anyone who has lived in New York City will tell you this is easier said than done. All it takes is a few holdouts to interfere with an assemblage. On top of that, California has very generous eminent domain laws. Without going into the sordid details (which we did examine carefully during the foreclosure crisis), they require any government body seizing property to pay a full price, well above an “urgent sale” level. This is not just a matter of statute but a solid body of case law.
However, an offsetting pressure is that neither Los Angeles nor California has declared a property tax holiday for burnt-out homeowners. Rental prices have soared due to the need for emergency housing. And insurance payouts will be slow, despite handwaves otherwise. So many will be forced to take quick offers from vulture buyers.
Mind you, yours truly recognized that big changes in how advanced economies like the US organize housing and provision themselves is way way overdue. But even at a high level, the new vision for Los Angeles sounds like imposing housing austerity on the middle class and poors without going after the big greenhouse gas emission hogs, and demanding they make sacrifices too.
Now to the main event.
By Jessica Corbett, staff writer at Common Dreams. Originally published at Common Dreams
U.K. actuaries and University of Exeter climate scientists on Thursday warned that “the risk of planetary insolvency looms unless we act decisively” and urged policymakers to “implement realistic and effective approaches to global risk management.”
Actuaries have developed techniques that “underpin the functioning of the global pension market with $55 trillion of assets, and the global insurance market, collecting $8 trillion of premiums annually, to help us manage risk,” Tim Lenton, University of Exeter’s climate change and Earth system science chair, noted in the foreword of a report released Thursday.
Planetary Solvency—Finding Our Balance With Nature is the fourth report for which the Institute and Faculty of Actuaries (IFoA) has collaborated with climate scientists. In financial terms, solvency is the ability of people or companies to pay their long-term debts. Co-authors of one of the previous publications coined the phrase planetary solvency, “setting out the idea that financial risk management techniques could be adapted to help society manage climate change and other risks.”
Three IFoA leaders—Kalpana Shah, Paul Sweeting, and Kartina Tahir Thomson—explained in their introduction to the latest report how “planetary solvency applies these techniques to the Earth system,” writing:
The essentials that support our society and economy all flow from the Earth system, commodities such as food, water, energy, and raw materials. The Earth system regulates the climate and provides a breathable atmosphere, it is the foundation that underpins our society and economy. Planetary solvency assesses the Earth system’s ability to continue supporting us, informed by planetary boundaries, tipping points in the Earth system, and other scientific discoveries to assess risks to this foundation—and thus to our society and the economy.
Our illustrative assessment of planetary solvency in this report shows a more fundamental, policy-led change of direction is required. Our current market-led approach to mitigating climate and nature risks is not delivering. There is an increasing risk of severe societal disruption (planetary insolvency), as our economic system drives further global warming and nature degradation.
“Impacts are already severe with unprecedented fires, floods, heatwaves, storms, and droughts,” the document points out, emphasizing that human activity—particularly burning fossil fuels—drives climate change and biodiversity loss. “If unchecked they could become catastrophic, including loss of capacity to grow major staple crops, multimeter sea-level rise, altered climate patterns, and a further acceleration of global warming.”
The report was released as wildfires ravage California and shortly after scientific bodies around the world concluded that 2024 was the hottest year on record and the first in which the average global temperature exceeded a key goal of the Paris agreement: 1.5°C above preindustrial levels. In the United States, experts identified 27 disasters with losses exceeding $1 billion.
“We risk triggering tipping points such as Greenland ice sheet melt, coral reef loss, Amazon forest dieback, and major ocean current disruption,” the new publication warns, adding that “tipping points can trigger each other,” and if multiple are triggered, “there may be a point of no return, after which it may be impossible to stabilize the climate.”
Food system shocks and more frequent and devastating disasters increase the risk of mass mortality for humanity—including due to hunger and infectious diseases—along with mass migration and conflict, the report highlights.
The conversation around the climate crisis isn’t to change or not to change – change is coming for us whether we’re ready or not. Time for leaders to take their heads out of the sand – we need to decarbonise, fast, and make our communities resilient. https://t.co/akb9IhErON
— Carla Denyer (@carla_denyer) January 16, 2025
“Climate change risk assessment methodologies understate economic impact, as they often exclude many of the most severe risks that are expected and do not recognize there is a risk of ruin,” the document stresses. “They are precisely wrong, rather than being roughly right.”
Specifically, lead author and IFoA council member Sandy Trust said in a statement, “widely used but deeply flawed assessments of the economic impact of climate change show a negligible impact” on gross domestic product (GDP).
However, Trust continued, “the risk-led methodology, set out in the report, shows a 50% GDP contraction between 2070 and 2090 unless an alternative course is chartered.”
To mitigate the risk of planetary insolvency, the co-authors called on policymakers around the world to implement independent, annual assessments; set limits and thresholds that respect the planet’s boundaries; enhance governance structures to support planetary solvency; and “enhance policymaker understanding of ecological interdependencies, tipping points, and systemic risks so they understand why these changes are needed.”
They also underscored the need to limit global warming and avoid triggering tipping points with actions such as accelerating decarbonization, removing greenhouse gases from the atmosphere, restoring damaged ecosystems, and building resilience.
“You can’t have an economy without a society, and a society needs somewhere to live,” said Trust. “Nature is our foundation… Threats to the stability of this foundation are risks to future human prosperity which we must take action to avoid.”
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